Issue 16 OCTOBER 2015
China’s Economic Slowdown
Inside Inside This This Issue Issue
Interview with Martin Wolf & Andy Burnham
The Tragedy of the Greek Economy
The Rise & Fall of Online Grocery Shopping
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Letters
The Nottingham Economic Review
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Foreword As I write this foreward, there are many uncertainties in the world around us: the future for Greece under its new government and the impact on the Eurozone; the decline in the price of oil – great for consumers, less so for producers and exporters; the political arguing in the UK around austerity or support for the NHS; the discussions around TTIP (Transatlantic Trade and Investment Partnership) between the EU and US; the apparent inequality in the distribution of wealth both globally and within countries; and as we come out of the warmest year in history, continuing debate over climate change and global warming. The real joy of being an economist is that we can use our analytical eye to explore all these a myriad of other problems that face the global economy now and in the future.
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To that end, students within the School of Economics have always been keen to apply their learning, knowledge and interests to a plethora of fascinating topics and the Nottingham Economic Review continues to be an excellent channel for sharing these thoughts. The quality of the thinking, the writing and indeed the sheer energy in researching these pieces has been a hallmark of the NER since its inception. I am delighted that it continues to offer this opportunity and equally I am very pleased again to offer my support to this latest edition. What I hope is that the readers of the NER will gain insight into areas of topical concern in a written style that is informative and communicates economic analysis in an appealing and intuitive fashion. I hope too that it prompts the reader to think further about these subjects, to find out more through research and indeed most importantly to be inspired to write their own article for the next edition. I sincerely hope this is the case but whatever your motivation for reading, I hope you enjoy it and will come back for more in future editions. Incidentally, those of you who are loyal readers will appreciate that this is possibly the first time in ages I haven’t mentioned my own research interest in food and food prices. For that you may be grateful, but who knows, maybe next time there might just be some food for thought from me! Professor Wyn Morgan Assistant Pro-Vice-Chancellor for Teaching and Learning & Professor of Economics
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The Nottingham Economic Review
Foreward
Dear Readers,
Dear Readers, On behalf of The NER team, it is our pleasure to present you the 15th issue of The Nottingham Economic Review. Now in its 8th year, and building on the continued success of previous issues, The NER offers students from Nottingham and the world to a platform engage a range of current economic and political themes. On behalf of theother NERuniversities team, it isaround our pleasure presenttothe 16thwith issue of the Nottingham Economic Review. Now in its 8th year, and building on the continued success of previous issues, the NER offers students from Nottingham and other This year, a broad range of external submissions is complemented by a contribution from every member of the editorial universities around the world a platform to engage with a range of current economic and political themes. team. 2015 will be an exciting year for politics, and with this in mind we’ve introduced a new ‘debate’ section, with this issue focussing on decreasing student faith in the mainstream parties. Features on the NHS crisis, government corruption With a broad range of external submissions as demonstrate well as a selection of articles writtenissues by ourat team of editors, this issue and the effectiveness of foreign aid a move towards addressing the forefront of politics within asks this a number of questions. Doandrugs causefocus, crime? robots take ourthat jobs? Whatbehavioural are the ramifications of China’s slowdown? issue. With economics we Will include contributions consider economics such as “Tipped Off”, and those that are concerned with competition theory, like “The Broadcasters Derby”.
As always, we are committed to providing a range of varied perspectives from across the political and economic specextend interviews the section. This issue a conversation Daniele individuals. Nosenzo, whoTo trum. One way We we continue achievetothis is byourdiscussing thoughts andincludes opinions of a numberwithProfessor of well respected discusses the work carried out by The Centre for Decision Research and Experimental Economics (CeDEx). Additionally, this end, we areEconomics thankful toEditor Martin Wolf (CBE), Chief Economics Editor at the Financial Times and Special Professor at the of The Sunday Times David Smith, ex-Home Secretary Charles Clarke and Ian Stewart, Chief EconoUniversity of Nottingham, who discusses whatinto we’ve learnt (and yet to learn) from theus2008 global financial crisis. Equally, mist at Deloitte, provide an insight the UK economy, as well as sharing with their expectations for the forthcoming we extend our appreciation to Labour leadership contender (at the time of writing) Andy Burnham and his team, for giving general election. us an insight into the challenges facing the Labour party today. We would like to express our gratitude for those that have made this edition, and indeed those that precede it, possible. Thewe School of Economics continues be of vitaltosupport Thethrough NER, andtheir as such we would like to thank all the thoseNER in Finally, as always, would like to express ourtogratitude those to that, continued support, enable the department with special mention to Kevin Lee, Sue Berry, Janet Lewis, Oliver Morrissey and Wyn Morgan. Without to continue publishing as it does. The School of Economics continues to be of vital support to the NER and we thank all Philip Watson, a Nottingham Alumni, The NER would fail to exist in its current form and to this end the team extends those in the department. Incontinued particular, KevinSpecial Lee, Hilary Sue Berry, and Oliverand Morrissey. thanks for his support. mentionClayton, must be made to JasonJanet SayerLewis as head of design production,Without to our Philip Watson, ateam Nottingham Alumni, the NER would fail to exist in its current form. We extend our sincere thanks forthe his of Associate Editors for all their hard work, and to Dom Moir as Finance Director, all of whom continue to make magazine what itmention is today. must It is their enthusiasm, and dedication The NER that has working with them such continued support. A special also be madetalent to Head of DesigntoJason Sayer, to made our team of Associate Edigreatwork, pleasure. we Moir wouldas likeFinance to thank Director, all those who taken continue the time totocontribute to The NER. what it is. tors for all their ahard andFinally, to Dom all have of whom make the magazine
Finally, we thank everyone who has taken the time to contribute to the NER.
James Longman, Hannh Kirby, Ben Hodges James Longman, Hannh Kirby, Ben Hodges
Congratulations to our February 2015 Prize Winners
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Gainsborough Prize Winner: Nicole Catling - The Rise & Fall of Online Grocery Shopping Gainsborough Prize Runner-up: Carlos Medel - Fuelling Future Prices: Oil Price & Global Inflation
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The NER Team
The Nottingham Economic Review
The NER Team About us: The Nottingham Economic Review is a student run bi-annual journal whose purpose is to showcase undergraduate research and promote ongoing advancements in economic thought. Every semester we gather submissions and publish those who we believe contain the most thought provoking, insightful arguments while simultaneously capturing the interest of our readers. We also publish a section dedicated to features and editorials concerning current affairs alongside interviews and Q&A sessions. Co-Editors in Chief Ben Hodges Hannah Kirby James Longman
Special Thanks to Philip Watson Hilary Clayton Sue Berry Louise Hemming Prof. Wyn Morgan Prof. Oliver Morrissey Charles Gedeon
Associate Editors Adam Williams Ashita Gaglani Apoorva Bihani Diana Beltekian Oluyinka Olutola Sophy Rolson Steven Thavendran
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Submit your research and articles to NER £750 Gainsborough Prize for the Best Submission & £250 for runner up For more info, including our latest issues, visit www.neronline.co.uk or email team@neronline.co.uk
The Nottingham Economic Review
Contents
Contents 03 Foreword and Prize Winners 04 The NER Team 05 Contents Features 06 Airport Economics - Bihani 07 Do Drugs Cause Crime? - Jacobs 10 Looking For Power In All The Wrong Places - Rolson 12 Are We Heading For a Zero Growth Economy? - Martin 15
[Interview] A Conversation With Martin Wolf cbe - Longman, Hodges & Rolson
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Will Robots Take Our Jobs? - Hegdekatte Technological Innovation: This Is Not Yet The End - Beltekian
Research & Competition Candiates 22 Fuelling Future Prices: Oil Price & Global Inflation (Gainsborough Runner Up) - Medel 25 The Rise & Fall of Online Grocery Shopping Gainsborough Prize Winner) - Catling Features 28 The Tragedy of The Greek Economy - Olutola 30 What Are The Ramifications of The Slowdown in China’s Economy & What Does The Future Hold For The Superpower? - Levin 32 The Contributions of Experimental Research To Health Economics: Both Past & Future - Ward 36
[Interview] Andy Burnham: Then & Now - Sayer
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In Cigarettes We Trust - Yunus Would increased Western intervention in Syria be the best course of action? - Thavendran The African Puzzle: Need for Drastic Measures - Khiwal
Bibliography 43 Images used
Prize Competition Former Alumnus Philip Watson is offering a £100 prize to all our readers who can solve this problem. The semi-mathematical problem requires “De Bono” thinking. Drilling a cube: A cube of 1 unit side is drilled through from all three sides with a drill size of 1 unit in diameter. What is the volume of one of the eight corner pieces that remain? Clue: Philip at university was considered ‘a square’ and not ‘a mod or rocker’! There is a solution available if required. The prize will be given to the first timed and dated by email that is correct. Please email the answers to team@neronline.co.uk
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Features
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Airport Economics Apoorva Bihani (BSc Economics, ‘17, The University of Nottingham)
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icture this: the city of London without Heathrow or any other airport. This would trigger a massive change in the city, not only reducing tourism and travel, but also impacting the economic diversity of the city. There would probably be lesser offices, banks and multi-national headquarters. London is a world capital and financial centre, but it would be unlikely for it to be the same if it weren’t so well connected with the rest of the world. Economies, if isolated from each other may only grow to an extent but air travel offers a quick link across borders, thereby encouraging trade and making it possible to exploit absolute and comparative advantage. In the past few decades, globalisation has begun to contribute majorly to economic growth as movement of capital and labour is becoming easier. Production and distribution of goods, crossborder investments, growth of multi-national businesses, are now faster than ever. Airports have, thus, become essential for development of business hubs and economic growth. Emphasis and importance of airports is increasing, as they have become strong reflectors of infrastructure, source of employment and attractors of business and tourism. But airports aren’t easy to plan and are expensive to build. They have large social costs that come in the form of environmental threats. The following article shall look at the social benefits and costs of airport and how the growing importance of airports may change the way they look in the future. Airports undoubtedly build infrastructure to support employment, tourism, investment, and local & global businesses. Economic benefits of airports can be largely divided into two categories: direct and indirect. Direct benefits include on site employment during construction and planning, and several jobs involving functioning and maintenance of the airport, along with attracting several tourists and business passengers. An airport can prove to be large source of employment,
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though number of jobs offered depends on its size. A small one like the East Midlands Airport offers just about 6,000 on site jobs, whereas a large international airport like Heathrow employs over 76,000 people. These jobs aren’t just limited to security and immigration officials, but also those associated with retail. On site retailing is increasingly becoming an essential for airports. Duty free shops provide excellent opportunities for retailers to exploit passenger’s waiting time to earn revenue at tax-free global platforms, which contribute to massive revenue numbers. Dubai Duty Free for example, generated nearly £1.2 billion in the past year of 2013-14.
“The U.S. and Western Europe often view airports as nuisances and environmental threats rather than as critical infrastructure to compete and prosper.” New airports or expansion of existing ones mean increased number of domestic and international flights, making travel easier for business passengers. Sending employees on international assignments, overseas franchising and expanding markets becomes easier as flying is cost efficient in terms of time. This indirectly increases employment in sectors that are positively affected by the newly created link between cities. Large benefits also spillover to the tourism industry, indirectly increasing employment and development of the sector in addition to tourists’ expenditure. For example, each aircraft landing at Melbourne airport contributes to £124,466 worth of visitors’ spending in the state of Victoria, Australia. Thus, trickle down effects of airports can prove to be significantly beneficial for the region as
well. However, the economic downsides of airports also have to be taken into account before measuring the overall impacts. Traffic, carbon emissions, global warming and the loss of green belt - the massive environmental trade offs should remind us not to be overwhelmed by the pure economic benefits brought by airports expansions. Residents in surrounding regions are exposed to higher levels of air and noise pollution, and in some cases may also even be required to relocate. This may also negatively impact the property rates in these regions, as people would be less willing to purchase houses prone to airport disturbances. Hence, adding to the difficulty of existing residents in relocating. The debated Stop Bristol Expansion Campaign in 2011 had painfully revealed the down side of airport expansion. It suggested that the social benefits might fail to outweigh its social costs. Campaigners for the expansion argued that greater job availability, tourism and business investment would have a substantial impact on the economy of Bristol and the southwest of England. Whereas, the ones against believe the expansion wouldn’t be a significant addition to the business as the existing airport has already serves its purpose. Instead, the expansion shall increase the ratio of passengers flying out of the southwest than those coming in. This implies that consumer expenditure, in tourism or other leisure sectors, may move to overseas destinations, which could otherwise have been soaked up in the southwest. Social costs and benefits of airports both can be large, and it is important to note their net effect before construction or expansion. Other than quantifiable costs and benefits, the weight attached to them also differs in perspectives. Author of Aerotropolis, John Kasarda, says, “The U.S. and Western Europe often view airports as nuisances and environmental threats rather than as critical infrastructure to compete and prosper. This has resulted in their maligning and neglecting airports while Asia and the Middle East invest heavily to leverage
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them. Such malign neglect comes at the longterm economic peril of the West.” This reflects the different perspectives on net benefits of airports across economies. Rich countries, which are already established with well-linked cities, may fail to see increasing contribution of airports to the economy. On the other hand emerging economies place relatively greater importance on them for the business they help bring in, as the marginal returns shall be greater for them compared to the developed economies. This may partly be the reason why China’s large infrastructural projects include building 82 airports in the period of 2011-15 in order to boost local economies. Kasarda’s book, Aerotropolis, explains the idea of airport centric cities that shall change the face of the futuristic cities. Due to their increasing importance, airports are expected
Features
to be the key contributor in economic development in a highly globalised world. The main business hubs, shopping complexes and attractions within minutes from the airport, making inter-city and cross border business
The airport is being constructed in the heart of the city and is expected to provide home and amenities for 2.6 million people. The theory of aerotropolis can be seen coming into practice in Zhengzhou, suggesting acceptance of the idea. It’s possible that economic emphasis on airports grows at a blistering pace and the practice of airports being built around cities may soon be a thing of the past! References
http://www.aerotropolis. com/airportCities/aboutthe-aerotropolis http://www. economist.com/news/ china/21646245-chinasfrenzied-buildingairports-includes-workcity-sized-projectsaerotropolitan-ambitions
and tourism extremely time efficient. An example of this can be seen in the development of a new airport in Zhengzhou, China. Though construction is on going, Zhengzhou airport is expected to handle 70 million passengers per year by 2030 and around 5 million tonnes of cargo.
http://www. heathrowairport.com/ about-us/companynews-and-information/company-information/factsand-figures http://melbourneairport.com.au/about-melbourneairport/planning/economic-benefits.html http://www.cate.mmu.ac.uk/research-themes/ environmental-capacity-at-airports/noise/ community-impacts/
Do Drugs Cause Crime? Laurie Jacobs (BSc Economics, ‘17, The University of Nottingham)
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. he idea that drugs cause crime is a popular narrative. “The suffering caused by the crime is now greater than that caused by drugs” declares Clutterbuck (Clutterbuck 1995: 3), echoing a sentiment often perpetuated by the media, who thrive on stories of violent and unpredictable drug users, committing numerous petty or acquisitive crimes to fuel their insatiable addiction. However, this article will argue that this is a socially constructed view of drugs, and the received view of the drugs and crime problem, does not corroborate with the evidence and patterns of drug use and criminality. Actually, there is little evidence to suggest that there
is a causal link between the consumption of drugs (defined in this article as the substances banned by the 1971 Misuse of Drugs Act) and criminality. Where there is a relationship between drugs and crime is not with regards to the individual drug user consuming illicit substances then committing criminal acts, but rather with regards to the system of prohibition, which creates and stimulates criminal activity, and this is an important distinction to make. Drug prohibition forces people to have to interact with an unregulated black market, wherein violence and intimidation are normatively embedded as tools to enforce
contracts and settle debts. It is important also to note, when analysing the complex area of drugs and crime that it is, for many reasons, very difficult to gain evidence in the area of drugs and criminality. This can be due to the fact that people may not be willing to admit to their deviance, they may believe that they will be looked upon more favourably if they blame criminal activity on their drug habit, and also the fact that the proliferation of drugs is a consensual crime, therefore there often lacks a ‘victim’ who will report matters to the police. However, it is clear that there is no causal link between drug consumption and crime. The relationship between drugs and crime however can be attributed to the punitive
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Features
system of prohibition that not only creates criminals, but also stimulates criminal activity. Goldstein describes the psychopharmacological model as the idea that, as a result of consumption of illicit drugs, an individual may become irrational and exhibit violent behaviour, this can be extended to other criminal activity other than violent acts (Goldstein 1985: 146).
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According to Helmer, there is no psychological evidence to suggest that the addict is a danger to himself or to others, or evidence that addiction itself produces dangers that have been psychologically conceived (Helmer 1977: 411). Alcohol, in fact, is far more
It is certainly true that certain psychoactive substances can have a radical effect upon an individual, making them act ‘out of character’ or in an unpredictable or erratic fashion.
However, the idea that this indicates causality between drugs and crime is extremely problematic. As Fagan (1990: 243) argues, the relationship between psychoactive intoxication and crime is extremely complex, mediated by personality, situational and sociocultural factors. Additionally, as Bean states, psychopharmacological crime is extremely difficult to measure. How many crimes can we judge to have been committed as a direct result of this condition? What if the perpetrator of the crime has ingested multiple types of drugs (Bean 2008: 22)? Also, many illicit drugs can be said to have an ameliorating effect on violent behaviour, such as heroin, ecstasy and cannabis, and it is actually, as Goldstein states, the withdrawal effects of drugs that can stimulate erratic behaviour, rather than the effects of drugs themselves (Goldstein 1985: 147). In fact no illicit drug is as widely associated with violent behaviour as alcohol is; 54% of jail inmates convicted of violent crimes in America in 1983 reported having used alcohol just prior to committing their offence (Nadelmann 1988: 18). Therefore, with respect to psychopharmacological crime, it is tenuous at best to assert a causal link between drugs and crime. It would exclude many other mediating factors that may have been influential, and actually misrepresents the ameliorating affects many drugs have on their users.
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linked to violent behaviour and crime in a psychopharmacological sense than any illicit drug, which poses quite serious questions as to society’s moral and pharmacological classification of drugs as a whole.
No illicit drug is as widely associated with violent behaviour as alcohol is; 54% of jail inmates convicted of violent crimes in America in 1983 reported having used alcohol just prior to committing their offence The second more popular, yet equally spurious, model posed as the link between drugs and crime is the economic compulsive model. The economic compulsive model suggests that drugs cause crime because drug users must engage in economically oriented crime, robbery, for example, in order to support their often extremely costly drug use (Goldstein 1985: 147). On the surface, this model does not necessarily seem counter-intuitive. It has been estimated that in Britain, a hard drug addict spends on average £33,000 a year
on drugs in the UK (Clutterbuck 1995: 3), so it therefore seems almost logical that many drug users, in the absence of an above average income, may have to turn to criminal activity in order to face such a steep bill. However, trying to assert a causal link between drugs and economic compulsive crime because of these statistics is extremely problematic because the relationship is unfortunately not so simplistic. As Hammersley argues, drugs rarely turn lawabiding citizens into thieves. Most drug users who steal in order to finance their drug addiction had acquired such skills well before they were addicted (Hammersley 2008: 4). Furthermore, drug-dependent people who are also known to commit acquisitive crimes tend to be clustered in areas of socioeconomic depravation, which typically are areas that also contain a higher concentration of people who commit crimes without drug use as well (Hammersley 2008: 1). Additionally, it is also the case that offenders may say they were committing their acquisitive crime to feed their drug habit, the inference being that were they not drug users, that they would therefore not be offending. The almost reductionist claim that drugs cause economic compulsive crime is derived from a deterministic conception of human action, and, much like the psychopharmacological model, ignores key explanatory factors involved with criminality. Indeed, the economic compulsive model would suggest that a way to put an end to acquisitive crime would be to prescribe drugs or drug substitutes, such as methadone, to addicts, which would then in turn remove the need for those individuals to commit said crimes. However, this has not been supported by evidence by studies in the UK, and although the prescription of drugs may reduce criminal activity, it does not stop it altogether. In some studies in the UK, it has even been indicated that the prescription of drugs has had no effect on acquisitive crime whatsoever (Seddon 2000: 97). Therefore, if acquisitive crime
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is not halted by the prescription of drugs, then this must suggest that the economic compulsive model excludes key factors in the analysis of drug related crime, and that, as stated, the model is far too deterministic in its understanding of human action, and the model does not take into effect other key factors which may affect the propensity for an individual to commit acquisitive crime, such as socio economic deprivation. An implication could be that a more general reduction in income disparity could reduce the acquisitive crime problem, away from a focus upon drugs as a whole. The model most demonstrative of the real link between drugs and crime is the systemic crime model. Systemic crime refers to the crime that is intrinsic to the involvement and distribution of illicit substances. Systemic crime can come in many forms, it could be violence between rival drug dealers over territorial disputes, violence within drug dealing enterprises if there are accusations of theft, for example, violence against those who inform to the police, or indeed violence towards customers if they fail to pay their debts (Goldstein 1985: 151). Therefore, systemic crime refers to crime not caused by the actual consumption of drugs and their affects, but rather the culture of violence and uncertainty that surrounds their sale and distribution. Systemic crime is the most prevalent link between drugs and criminality, and is perpetuated and stimulated by the system of prohibition, which exists in most states today. Prohibition makes the drugs market a black market, and as Nadelmann argues, maintains the price of illicit drugs at a significantly higher level than it would be if there were no such laws, in other words creating an extremely profitable market indeed (Nadelmann 1988: 7). As Helmer describes, the prohibition of drugs is ‘criminogenic’, in that it creates the structural conditions that cause other people to commit crimes (Helmer 1977: 413). The prohibition of drugs of course creates crime in the direct sense, in that it criminalises the act of purchasing or distributing illicit substances, but more importantly also stimulates crime, through the creation of a highly profitable black market. This black market by its very nature is lawless and unregulated. The criminal organisations and entrepreneurs that thrive in this market are not bound by business law in their competition
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with one another, collection of debts or their investments in markets other than drugs. Therefore, the organisations involved in drug trafficking may use any method they see fit in their pursuit of profit, and this pursuit, usually driven by intense competition, is more often than not characterised by brutal violence, which can affect innocent members of the public just as much as those involved in the drug trade. As Goldstein states, violence is normatively embedded in the social and economic networks of drug users and sellers (Goldstein 1985: 159). The proliferation of systemic crime does not mean that drugs cause crime, but rather that the system of prohibition in place in most states facilitates criminal practices, and it is within this model of systemic crime that we can see where criminality and drugs are most related.
It has been estimated that in Britain, a hard drug addict spends on average £33,000 a year on drugs In conclusion, whist the belief that drugs cause crime is a popular, strongly socially constructed narrative, the idea that the consumption of illicit drugs causes crime, or creates criminals, is not supported by evidence. As Hammersley aptly states; “despite what people may believe, the connections are in fact far too complicated to summarise as a straightforward ‘drugs-crime’ relationship” (Hammersley 2008: 1). It would seem counter intuitive to suggest that drugs and crime are in no way linked, and the best way to describe this link is through the systemic crime model, but this is a long way from stating that there is a causal relationship. Emphasis should not be placed on the individual drug user, but rather the system of prohibition, which as stated, creates and stimulates systemic crime, by forcing individuals to interact with an unregulated, lawless black market system, in which violence and intimidation are perennial features. Normatively, this has considerable ramifications.
and could be placed into a regulated, taxed and safe market, profitable for governments rather than criminal organisations. Even less radical approaches may prove beneficial, which could include the decriminalisation of drugs, taking the emphasis of prosecution away from individual drug users, and focusing on the criminal enterprises that distribute illicit substances, a policy which has experienced notable success in Portugal (Transform 2014: 3). At the very least, a deeper analysis of the misrepresentation of the link between drugs and crime should spur the need for an evidence based drug policy, rather than a continuation of the misled, often ideological, system of drug prohibition. References: Bean, Phillip (2008) Drugs and Crime Devon: Willan Publishing Clutterbuck, Richard (1995) Drugs, Crime and Corruption London: Macmillan Fagan, Jeffrey (1990) ‘Intoxication and Aggression’, in Tonry, M. and Wilson, J.Q (eds.) Drugs and Crime Chicago: University of Chicago Press Goldstein, Paul (1985) ‘The Drugs/Violence Nexus: A tripartite conceptual framework’, Journal of Drug Issues 39: 143-174 Hammersley, Richard (2008) Drugs and Crime Helmer, John (1977) ‘The connection between narcotics and crime’, Journal of Drug Issues 7/4: 405-418 Nadelmann, Ethan (1988) ‘The Case for Legalisation’, National Affairs 92: 3-31 Seddon, Toby (2000) ‘Explaining the Drug-Crime Link: Theoretical, Policy and Research Issues’, Journal of Social Policy 29/1: pp 95-107 Transform (2014) ‘Drug decriminalisation in Portugal: setting the record straight’ (June 2014) Transform: getting drugs under control, Available at: http://www.tdpf.org.uk/resources/publications/ drug-decriminalisation-portugal-setting-recordstraight (Accessed 09/11/2014) Tullis, LaMond (1995) Unintended Consequences: Illegal Drugs & Drug Policies in Nine Countries London: Lynne Rienner Publishers.
Admittance that prohibition does in fact stimulate criminality would then imply that steps toward legalisation would be advisable. The drug trade would then be taken out of the hands of the lawless black market, theoretically eliminating the presence of systemic crime,
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Features
The Nottingham Economic Review
Looking For Power In All The Wrong Places Sophy Rolson (BSc Economics, ‘16, The University of Nottingham)
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..hroughout its history, Russia has been fuelled by a desire to become a great power. Unsatisfied with a mediocre position in the world order and modest ambitions such as improving living standards, this is a country that values strength, control and influence above all else. However, it has been crippled time and again by placing its faith in the wrong instruments: propaganda, military forces, and exporting oil and gas. Whilst playing to its strengths in this way may seem a sensible strategy, it doesn’t spread the risk very well if one of these methods is to fail. It now seems as though all three of these tools have let the country down at once, either through misuse or sheer bad luck, leaving Russia weakened and threatened by an imminent economic crisis. Now it is faced with a choice: to break with tradition or to abandon its ambitions. The Power of Propaganda It hardly needs stating that the West has long had a less than savoury perception of Russia, and it has come to the attention of President Vladimir Putin that this could be harming business relations with his country. In a short-sighted attempt to correct this, he has been using Western media to project the image that Russia is trustworthy, reliable and responsible in order to attract foreign investment. However, whilst Putin’s word is impossibly compelling within his borders, with one of his addresses even being dubbed ‘A Message From Above’, his assurances have fallen rather flat with his Western audience. Actions speak louder than words, after all, and Russia’s recent actions have ensured ‘trustworthy’ is one of the last words associated with the country. A notable example of Russia’s unreliable business conduct is the tendency of its state-controlled gas supplier, Gazprom, to cut off gas supplies to Ukraine. This has occurred three times in the space of eight years, resulting in gas shortages in several EU countries. As tensions have
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escalated between Russia and Ukraine, Putin has tried to defend this behaviour by insisting that he would never use energy to assert political pressure. In the West people remain unconvinced. Gazprom’s actions seem less like sound business decisions and more like another threat to Russia’s strained relationships with its neighbours. If Putin really expects the West to overlook these recurring betrayals and see Russia as a dependable partner he will be sorely disappointed.
Actions speak louder than words, after all, and Russia’s recent actions have ensured ‘trustworthy’ is one of the last words associated with the country. In a further display of his ignorance, Putin fails to realise that business relations are a two-way street. At the same time as trying to convince the West that Russia is nothing but innocent, he forces hate-filled propaganda down the throats of Russians to turn them against foreigners. In his 2014 state of the nation address, Putin claimed that the West tries to come up with excuses to ‘contain Russia’s growing capabilities, affect [the] country in some way, or even take advantage of it’. When Russian political opposition leader Boris Nemtsov was assassinated on the Kremlin’s doorstep in February, Putin commented that Nemtsov was ‘a lot more interesting’ to the West when dead. These are but two of many undisguised attempts to sow suspicion, hostility and discord between his people and outsiders. Still Putin insists that Russia will ‘never enter the path of self-isolation, xenophobia, suspicion and the
search for enemies’, but the truth is that he started leading Russia down that path a long time ago. Propaganda has undeniably been a useful tool within Russia, but it was a mistake to think that it could have the same impact on the rest of the world. If anything the West’s perception of Russia has grown more negative, and instead of making the country more influential, it has made a single man more powerful. By turning the people of Russia against outsiders and casting blame onto others, Putin has left his citizens with no one else to turn to but each other and himself. With recent opinion polls rating his popularity as high as 86%, it is obvious the country has united behind him. It is a shame this confidence appears to be misplaced. Military Might Fighter jets, warships, weapons of mass destruction…military capabilities are a daunting and unsubtle display of a country’s power. Before the demise of the Soviet Union in 1991, the USSR posed a formidable military threat to the West. However, its collapse led to a chaotic period of transition as Russia transformed into something resembling a democracy and market economy. This left its military capabilities significantly weakened and its people feeling nostalgic for the power they once had. Now, almost 24 years on, Putin proclaims that ‘no one will ever attain military superiority over Russia’. Unfortunately, this is not even close to being true. Whilst Russia’s military is impressive, it comes second by a long way to the US. One source estimated that out of 25 sources of military power, Russia lagged behind the US on 16 of these. On top of this, the US defence spending is over seven times larger than Russia’s. As Russia seems determined to see the whole of the West as one large opponent, its relative power diminishes even further. However, this has not deterred it from exercising this power. In March 2014 Putin
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deployed Russian troops to Ukraine, violated international law with his illegal annexation of Crimea, and has since been supplying proRussian rebels with weapons and military training. Such arrogant and reckless actions may have made Russia feel powerful initially, but the West was not just going to sit back and allow this imperialistic landgrabbing to happen on its borders. Now Russia must face the consequences. The EU and US were quick to slap sanctions on targeted individuals and businesses in Russia, including three major state oil firms. These sanctions involve travel bans, asset freezes, restrictions on state banks and a partial ban on oil exports. This hit the Russian economy and ruling elite hard, particularly as it coincided with a fall in oil prices, leaving Russia weak and unappealing to investors. On top of this, the West has the power to crush Russia’s economy entirely through actions such as blocking Russian banks from using the SWIFT international payments system or barring all oil exports from the country. Whilst this hasn’t been implemented yet, the threat of it looms over Russia. A growing anxiety has replaced an ignorant disregard for the sanctions as living standards have fallen, and in just nine months support for the presence of Russian troops in Ukraine has plummeted from 74% to 23%. Clearly it is about time the state started putting its power to good use and showing more of an interest it its people than in itself. The sanctions the West has imposed on Russia demonstrate that economic strength can be equally as menacing as military strength, and to a certain extent the former is necessary for the latter. Putin has chosen to learn this lesson the hard way. For a man who once called for closer integration with the West and desired to be ‘respected internationally’, he now seems determined to be only aggressive and uncooperative. Power alone will not earn respect; that will come only when Russia learns not to abuse its power. Energy Exports Proudly titled an ‘energy superpower’, Russia
has an enormous natural wealth in oil and gas. In 2012 it produced over ten thousand barrels of oil a day, of which it consumed only a fraction. The revenues generated from oil
and gas comprise around 70% of exports and 50% of the federal budget. This makes Russia’s economy hugely dependent on energy prices, so much so that its currency, the rouble, closely tracks the price of oil. In 1998 this led to a devastating crash when the oil price fell, and Russia eventually defaulted. Considering the state’s hunger for control, it seems strange that little has been done to amend this vulnerability.
In just nine months support for the presence of Russian troops in Ukraine has plummeted from 74% to 23% However, the high oil prices that bolstered Putin’s presidency for over a decade apparently drove all thoughts of diversification from his mind, and so Russia has inevitably come to face the same problem again. The crude oil price plummeted in the later half of 2014, dragging Russia’s struggling economy down with it. In a futile attempt at intervention, the Central Bank of Russia orchestrated a midnight interest rate hike and bought $2 billion of roubles to try and salvage some of its currency’s value. Despite
this, Russia’s GDP is forecasted to drop by 4.5% in 2015, inflation reached 16.7% in February, and direct investment inflows have all but dried up. The country’s vast foreign reserves that Putin spent years accumulating are depleting rapidly. If the low oil price persists, Russia will find itself in a debilitating crisis. It is a harsh truth that Russia’s greatest source of power is also one of its greatest weaknesses, but it is a truth that cannot be avoided any longer. It must diversify and improve competitiveness in its many inefficient industries such as farming in order to create a more stable economic environment. However, the state seems reluctant to do this. Instead, in November 2014 Russia agreed to invest in new pipelines to export gas to China, opening up a large new market and source of demand for its energy exports. Since Europe is currently Russia’s largest export market, this move suggests that Russia views its close ties with the West as more of a weakness than its dependence on oil prices. Either way, it’s a step in the wrong direction. A New Direction Russia is a country with vast potential. Its people are proud, strong and ambitious. But to develop and grow into the powerful nation it longs to be, it must make some crucial changes. Instead of trying to alter its image abroad, Russia should make its behaviour fit with the image it wants to portray. Being less aggressive, more cooperative and refraining from breaking international law will greatly increase foreign respect for Russia, and with respect comes power. Putin needs to stop distorting the way Russian citizens think, making them see the rest of the world as an enemy to overcome rather than an opportunity for integration and success. The path of isolation will not lead Russia to power and glory but to stagnation and ruin. Economic reform is also necessary to prevent the economy’s overreliance on energy and to provide a strong enough foundation to sustain the country’s immense military power. Without vital diversification
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and improvements in productivity, Russia is destined to fall at the same hurdle time after time whilst its competitors have the freedom to progress. Unfortunately there is less room for tradition in today’s dynamic world, and a stubborn refusal to part with familiar but inappropriate strategies may force the nation to sacrifice its dreams of power. The choice is clear; it’s up to you now, Russia. References: Feklyunina, V. (2008). Battle for Perceptions: Projecting Russia in the West. Europe-Asia Studies. 60 (4), pp. 605-629. Last accessed 12th April 2015. http://eng.news.kremlin.ru/news/23341. Last accessed 12th April 2015. http://www.bbc.co.uk/news/worldeurope-31693234. Last accessed 12th April 2015. http://www.bbc.co.uk/news/world-31619553. Last accessed 12th April 2015. http://www.bbc.co.uk/news/world-
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europe-28357880. Last accessed 12th April 2015. http://www.bbc.co.uk/news/worldeurope-26672800. Last accessed 12th April 2015. http://www.bbc.co.uk/news/worldeurope-28400218. Last accessed 12th April 2015. http://www.britannica.com/EBchecked/ topic/513251/Russia/274473/Economic-reforms. Last accessed 12th April 2015. http://www.edition.cnn.com/2014/07/18/world/ europe/ukraine-malaysia-plane-questions/. Last accessed 12th April 2015. http://www.eia.gov/countries/cab.cfm?fips=rs. Last accessed 12th April 2015. http://www.ft.com/cms/s/0/db64d8f8-f522-11e3afd3-00144feabdc0.html#axzz3fI3r7FuE. Last accessed 12th April 2015. http://www.globalfirepower.com/countriescomparison-detail.asp?form=form&coun try1=russia&country2=united-states-ofamerica&Submit=COMPARE. Last accessed 12th April 2015.
http://rt.com/business/215255-russiaruble-1998-2014/. Last accessed 12th April 2015. http://www.theguardian.com/commentisfree/2014/ mar/14/crimean-referendum-illegal-internationallaw. Last accessed 12th April 2015. http://www.tradingeconomics.com/russia/inflationcpi. Last accessed 12th April 2015. The Economist (2014). Many Winners, A Few Bad Losers. 25 October, pp. 14. Last accessed 12th April 2015. The Economist (2014). The Rouble’s Rout. 15 November, pp. 81. Last accessed 12th April 2015. The Economist (2014). Russia’s Wounded Economy. 22 November, pp. 13. Last accessed 12th April 2015. The Economist (2014). Putin’s People. 13 December, pp. 40. Last accessed 12th April 2015. The Economist (2014). Going Over the Edge. 20 December, pp. 109. Last accessed 12th April 2015.
Are We Heading for a Zero Growth Economy? Josh Martin (BA Economics, ‘17, The University of Nottingham)
T
supply curve would constrain long run ..In my last article for the NER, entitled, economic growth, a limit to resources would The Point of Sufficiency, I questioned constrain production. I verify that resources are whether economic growth is always the best policy, and demonstrated that after Crude Oil Demand a GDP per capita level of $28,000 is reached, (millian barrels/day, 12-month avg.) benefits from economic growth were no longer guaranteed and the potential drawbacks begin to outweigh the positives. In this article I ask whether we will be able to continue to grow indefinitely, regardless of whether or not we want. I explore the concept of a zero growth economy – a world limited by resources, which must eventually reach a steady state with no further economic growth. Since we need resources to produce goods and Source: Oil Market Intelligence services, and growth requires the scarce, and production of ever more goods and services, use projections for population and economic limited resources means limited production growth to suggest what level of prosperity and hence a limit to growth. Just as a vertical could in theory be maintained in a zero growth
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economy in the long run. I then consider oppositions to the theory. Whose idea is it anyway? The idea of a zero growth, or steady state, economy is not new. John Maynard Keynes, one of the most influential economists of all time, argued that “The day is not far off when the economic problem will take the back seat where it belongs, and the arena of the heart and the head will be occupied or reoccupied, by our real problems - the problems of life and of human relations, of creation and behavior and religion.” Always a philosopher, Keynes saw the accumulation of money as a means to an end, rather than an end in itself, and in a zero growth economy, this must also be true. John Steward Mill also foresaw a zero growth economy; “... the increase of wealth is not boundless. The
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end of growth leads to a stationary state. The stationary state of capital and wealth… would be a very considerable improvement on our present condition.” Recently The Limits to Growth book by global think tank The Club of Rome examined whether finite resources were compatible with exponential economic growth, and although ridiculed at the time, it seems to gaining more and more respect as the ideas presented begin to ring true. The list could go on.
and shows that the increase in demand is almost all from developing nations like China. Total world proved oil reserves reached 1687.9 billion barrels at the end of 2013, which
Other finite resources which attract less attention but are no less crucial include water and farmland. According to the OECD, water demand is projected to increase by 55% by 2050, due to increases in manufacturing and other demands. While water levels vary dramatically all over the world, many countries and regions have experienced severely depleted groundwater levels in the last 30 years, and this is set to continue, meaning wells will be unable to reach the water level, prices will rise and farmland will deteriorate. Land to grow crops and food is also projected to be insufficient in the coming decades. If 9 billion people ate at Western levels, we would require 4.5 billion hectares of cropland, but there are only 1.4 billion hectares of cropland on the planet. By 2050 based on current trends, we will be using two planet’s worth of resources every year – clearly unsustainable.
When will we run out of oil? would last another 35 or so years at current To begin my analysis, the argument of limited consumption trends. Factor in increased resources must be verified. In this section I production, although at a decreasing rate will provide evidence that there will come a according to peak oil theory, and the figure point in the future where we reach the limit will be higher, but I think it is a fair estimate of the Earth’s abundance. Comparison of Growth Rates in Advanced The obvious finite resource and Developing Economies is oil, which is essential in production and modern life, and has often been described as “running out”. Predictions of ‘peak oil’ – the point at which maximum extraction is reached – There are many more range from between 1991 resources which are projected and 2000 by Hubbard, who to be insufficient all too soon; initiated this discussion, to minerals, precious metals. 2060 (Odell, 1999). Some Commodity prices have even suggest that the peak rocketed in recent decades, is not yet visible (Lynch, due to limited supply and 2003). General consensus is increasing demand. The graph in the range of 2010-2030. that supply might become severely restricted below shows the increase, and despite a by 2060. While oil may not actually run out dramatic fall during the Global Financial Crisis, While the absolute timing of the end is for a century, extremely high prices due to non-fuel commodity prices have more than uncertain, there is no doubt that there severely restricted supply will price many out doubled in 15 years (Index: 2005 = 100). It is will be an end, since it takes clear that if we do not change, the Earth Combined GDP of Advanced and Developing Economies millennia for oil to be formed will be insufficient for our needs. in the ground, and current extraction rates mean we will A Basic Model run out eventually. The rate I have argued that by 2060 our natural of depletion depends also resources will have become severely on how quick we are using diminished, meaning that we have arrived it. The United States Energy at the limit of what we can produce. Information Administration While some resources can be predicted in 2006 that world replenished in order to sustain consumption of oil would current activity, they cannot be increase to 98.3 million barrels increased, and hence production cannot per day (mbd) in 2015 and be increased; we cannot use more land 118 mbd in 2030. The Global than we have, or more oil than what is Financial Crisis seems to have left. Hence global economic growth is no slowed this trend, and current predictions for of the market, making the resource effectively longer possible. Growth has become a zero 2015 are now around 94 mbd, up from 84.4 unobtainable. sum game – for one country to grow, another mbd in 2009, an average annual increase of must shrink by an equal amount. In other about 2%. The graph below shows this trend, What about other commodities? words, total wealth is now fixed. To calculate
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the value of wealth per person, we must calculate economic growth up until 2060, at which point it will stop, and population growth. Economic growth is typically faster in developing countries like China and the BRICS than the developed countries of the OECD. However, as these developing countries catch up with the OECD their growth rates too will slow. China is a prime example; growth has slowed significantly in the past few years, and is projected to continue doing so. Jeremy Grantham of global investment management Country
US$
Luxembourg
112,473
Norway
100,579
Australia
64,578
United States
53,001
Germany
44,999
France
44,099
United Kingdom
39,372
Japan
38,468
European Union
34,060
Greece
21,857
Russia
14,591
Brazil
11,173
China
6,959
Bhutan
2,633
India
1,509
North Korea
583
Malawi
223
firm GMO states future US economic growth will approximate “0.9% a year through 2030, decreasing to 0.4% from 2030 to 2050.” This is consistent with a zero growth economy by around 2060. The below graphs give an example that could arise under the conditions described.
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Accurate predictions of economic growth and GDP are virtually impossible, and are beyond the scope of this article. Estimates of growth rates for even the next 10 years vary widely, and different assumptions can also drastically affect estimates. There is currently no literature that predicts world economic growth and GDP figures under a slowing world economy. Instead, I extrapolate from IMF predictions for advanced and developing economies until 2019, and introduce reducing growth rates over time due to resource scarcity as described, leading to zero growth in 2060. GDP per capita Gross world product was approximately $77.6 trillion in 2014 according to the IMF. With a world population of approximately 7.3 billion at the time, nominal world GDP per capital can be calculated as about $10,600, which is consistent with most estimates. From the basic model above, world GDP would equal approximately $230 trillion in 2060. This is not vastly different from IMF estimates – approximately $220 trillion. For world GDP per capita, we also need a projection of world population for 2060. Population estimates also vary widely; projections from the UN in 2010 suggest 8 billion at the low end and 11.5 billion at the high end, with a median projection of 9.5 billion for 2060. The 2012 revision of this estimate suggests about 10 billion in 2060 as a median estimate. Using these figures, nominal world average GDP per capita could be around $22,000 in 2060, significantly higher than today. There is likely to still be significant inequality though, as population growth will be driven by Asia and Africa, and hence prosperity will be shared out between more and more people in these areas. Meanwhile in OECD nations, populations are expected to stagnate, or even decline, and hence the increase in prosperity will be shared between similar numbers of people as today. In a zero growth economy, only the distribution of wealth can be altered, not the absolute value of wealth. Hence our estimate that nominal average world GDP per capita will be $22,000 cannot change. If we expect economies to converge in terms of prosperity then developed economies would have to become worse off to allow developing countries to become better off and converge at the average. The table below shows current nominal GDP per capita figures for selected countries.
Is there another way? A common criticism of zero growth theory is that technological change is not considered. Techno-optimists argue that technological change could allow us to continue to produce more, and hence grow, with the same amount of inputs by making the production methods more efficient. Running out of oil may not even be a problem if technological change allows us to drive cars using solar power for example. This would be like shifting the boundary of production outward. However Jeavons Paradox, also known as the Rebound Effect, may call this into question. In 1865, William Stanley Jevons observed that technological improvements that increased the efficiency of coal use led to increased consumption of coal; greater efficiency led to greater consumption, which would limit the effects of efficiency gains in the zero growth economy. In their book Techno-fix in 2011, Huesemann and Huesemann find definitive proof that resource and energy use efficiency gains have almost always been outpaced by economic growth, hence leading to net increases in consumption of resources. Laws of science also limit how far efficiency gains can go. In all, technological change may postpone the problem, but it is unlikely to alleviate it altogether. Conclusion In conclusion, I have shown that resource scarcity will eventually push the world towards a zero growth economy. I suggest around 2060 as a possible time for this, but projections of remaining reserves and future demand for commodities makes this prediction unreliable. The basic model suggests economic growth will slow gradually in developed countries, due to resource scarcity and the rise of the developing nations, while growth will rise in developing countries in the short term before eventually tailing off. By 2060, growth will be close to zero. World population estimates vary widely, but the consensus is that it will be around 10 billion by 2060. The model therefore predicts average world GDP per capita in 2060 of about $22,000, significantly higher than the current figure. However inequality between developed and developing countries will persist, and for convergence, the developed countries would have to shrink. Techno-optimists argue that technological advancements will allow greater efficiency in production, removing the limit to growth, but this is also debated.
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A Conversation with Martin Wolf cbe Chief economics commentator at the Financial Times
Interviewed by James Longman, Ben Hodges & Sophy Rolson (BSc Economics, ‘15, ‘15 & ‘17, The University of Nottingham)
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..artin Wolf, chief economics .commentator at the Financial Times and an honorary professor at the University of Nottingham, visited the university in February to deliver a talk as part of a series of globalisation lectures. The talk, titled “The Shifts and the Shocks: What we’ve learned – and have still to learn – from the financial crisis,” is based on Martin’s book of the same name. Martin explains how a complex interaction between globalisation, global imbalances and a fragile financial system gave rise to the crisis of 2008. Whilst he is certain that further crises are yet to come, particularly as a result of the ‘defective architecture’ of monetary union in Europe, he offers a comprehensive analysis of the possible solutions that have been proposed. We caught up with Martin before his lecture to hear his insight into some of the current issues facing the global economy. Your book proposes a number of resolutions for strengthening the economy such as The Chicago Plan. Do you worry that, much in the same way those that predicted the financial crisis back in 2008, these recommendations shall fall foul of financial and political interest? Yes, I’m sure that the more radical proposals will not be implemented. But the aim of putting forward these ideas is simply to shape what is seen as discussable, perhaps to alter the boundaries of things we can talk about. Though it should be said that in a strange way we have moved into this direction [towards the Chicago Plan - advanced in the 1930s by Irving Fisher, it involves a 100% requirement of reserves against deposits, supposedly to reduce business cycles and public debt] by accident, due to quantitative easing. Quantitative easing creates vast quantities of reserves which are used to buy assets,
causing liabilities in the banking system. Due to this “bi-product”, we have inadvertently already moved a long way towards a 100% reserve requirement. In theory this will be reversed so it’s not a permanent increase, but one can imagine a situation where this needn’t happen; reserves may continue to increase for a very long period of time.
to exclude the relatively erratic items like commodity prices, food and fuel. If there’s a fall in energy prices it may show up as deflation for a short period, just as, a few years ago a price increase caused inflation for a short while. My view then was: we didn’t need to worry about the inflation that was crated by higher oil prices because it was only likely to be temporary, so the Central Bank should ignore it. Fortunately, they did. I think exactly the same is true now in the opposite direction, so I’m not in the least bit worried by deflation that is caused by lower oil prices. On the contrary, on balance the impact of lower oil prices in our economy is likely to be expansionary overall, as it shifts income from oil producers to consumers, and generally consumers have a higher propensity to spend.
After a year or so of struggling with low inflation, the Eurozone has slipped into deflation for the first time since 2009. Given the falling oil prices, many other countries such as the US, the UK, Canada and China are experiencing inflation well below the target level. How harmful do you think this negative inflation is to the global economy? Can you see it becoming a deflationary spiral? We have to separate “good” deflation from “bad” deflation. It’s important to consider deflation in the core aggregates - that is,
This is completely separate from ultra-low “core” inflation, which is a problem at the moment for a number of economies, particularly Japan and parts of Europe. Long-term core low inflation (or worse, deflation) can cause problems because it means that the real value of debt tends to rise over time. If low inflation coincides with very low wage growth, which is often does, then the real burden of debt on people who’ve borrowed doesn’t fall either, because their wages aren’t rising at all. Because it’s very difficult (although not impossible) to make interest rates negative, then this can be a real problem. So, the concern lies in those economies where core inflation is low. In the Eurozone core inflation is well below 1% which is far below their target. It makes adjustments of competitiveness within the Eurozone far more difficult because Germany’s inflation is 1% (core) and others then have to have
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negative inflation merely just to improve their competitive with Germany. So the very low inflation trend is a worry. The Greek debt stalemate has persisted for some time now, and many believe it impossible for Greece to ever repay what it owes. How likely are they to come to a solution that doesn’t involve an exit from the Eurozone? What is the best outcome we can hope to see at this stage? First of all, at the moment (although it could change tomorrow!) it does look as though Greece will remain in the Eurozone, at least for the next few months. I suspect there will be some sort of package agreed, which will keep Greece in the Eurozone in the long run. You raise two questions that go beyond that… In my view it is clear that Greece will never pay the debt that they have now contracted. So the question is “how do you fudge it?” There are a number of ways. The first: keep interest rates very low (which they are) and postpone repayment for a decade or more (which they’ve essentially done). Then, in 10 or 20 years from now, if everything’s gone reasonably well they can refinance it. The economy might in fact grow more than we think… If this happens, the debt will have shrunk a lot and will be manageable (although still not repaid). While this scenario may not be optimal, it does of course mean they can stay in the Euro. It is worth remembering, however, that default does not necessarily mean being evicted from the Euro. (Consider Russia that defaulted in 1998 – it still kept the Ruble!) So the question for Greece is one of how it’s handled; the difficulty would arise in the event of an un-agreed default. Under these circumstances, because the Greek currency (and European central bank) is not its own, an un-agreed default would mean that Greek banks were no longer backed by the Central Bank. With the ECB no longer financing these banks, a bank run would ensue and the Greek banking system would cease to exist. Greece would be forced to use a different currency and leave the Eurozone. But a default doesn’t need to lead to an exit! Can Greece thrive without being in the Euro? I’m open minded. There’s a perfectly good argument that says Greece cannot survive economically while being in the Eurozone. The argument is that despite the fall in wages, Greece still has a very weak and uncompetitive economy. Its current account
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balance is very poor due to a huge recession and it has very weak export industries. It requires a huge gain in competitiveness and for this to happen wages have to fall relative to its European partners. It’s almost possible to drive down wages further without the recession continuing… So if that story is correct, then Greece cannot grow and prosper properly if it stays in Europe because it’s fundamentally uncompetitive. This is true for other Eurozone countries too. If this is the case, there exists a good argument to leave. The argument against, however, is that for Greece, leaving the Eurozone would lead to chaos: capital flight, closing the banks at least temporarily, a complex operation to produce a new currency and could possibly even trigger a civil war. Even if it’s true that Greece will not do well inside the currency union, it may do even worse outside of it.
It’s worth investing in education – not to an incredible degree - but it plays an important role in giving people a chance Growing inequality is increasingly viewed not just as a worsening social issue, but also as a barrier to future economic growth. In your recent book, you describe Thomas Piketty’s policy recommendation of a global wealth tax as “unquestionably too ambitious.” To what extent do you agree with the premise (that rising inequality poses a risk to future growth)? What would you recommend? I don’t think the global wealth tax is feasible – there’s no possibility of agreement. I think that the evidence on the link between inequality and growth is very complicated… It’s good to be clear that I believe rising inequality is not a good thing, but not just for economic reasons. I certainly wouldn’t argue that the only reason one should worry about rising inequality is that it might lower the growth rate. Even if it didn’t you should be concerned about it, because it has political implications and implications for who gains the benefit of the growth. It can affect life chances and political power. So it’s important not to take too narrow a view on why inequality matters. I’m also not an egalitarian: I don’t believe we can have
absolute equality or even that it’s a desirable goal. Second point. I think there is evidence that beyond a certain point rising inequality damages the economy. Though the results are not completely water-tight, there’s enough evidence to be concerned and the IMF and OECD have published papers on this issue. Why do rapid rises in inequality should damage growth? Some of it is demand side (which I discuss in my book); inequality causes income to go to people who spend less. Some of it is about the damaging policies that follow. In highly unequal societies policies tend to become more populist, which can be economically damaging by promoting inefficiencies. It might also affect the way that companies work, although this is less clear. We can divide the potential solutions into pre-tax and post-tax policies. For pre-tax, there are a whole range of things you might consider… Some of the increase in inequality has occurred, I think, because of the presence of monopolies, which can be tackled using competition policy. Additionally, some of it has occurred because of excessive increases in the size of the financial sector due to rent extraction. I recommend policies that involve deleveraging our economies – particularly getting rid of the tax deductibility of debt, which could have quite a large effect on the size of the balance sheets of the financial sector (and therefore the amount of money people make). I also think that there are alternatives to the role of the financial sector in important ways. For example, the move we’ve started towards large nation-wide pension funds with very low fees, benefit from large economies of scale (there is nothing to be gained from having several pension funds competing but each setting high prices and extracting incomes from many people). It’s worth investing in education – not to an incredible degree - but it plays an important role in giving people a chance. Finally, we should support a financial sector that supports entrepreneurship. Regarding post-tax suggestions, a global tax is not needed provided we have information sharing. It’s important that all
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fiscal jurisdictions be required to report tax. This would make it possible to construct tax regimes such that at least the major economies can tax everybody that lives there, and all of the corporations that locate there. Tax inheritance. Information sharing allows you to tax income, no matter where in the world it was earned. One big problem is tax havens. One way around it that I suggest is to attribute all corporate income to shareholders (all shareholders, except a few, are all residents of major countries). This way, it is all taxable. Finally, the major OECD countries should agree there are certain places in which major western companies simply won’t be allowed to domicile themselves. For example, if a major western company says it’s really located in Luxemburg or the Bahamas, then the response of our tax authorities should be: “no you’re not. That’s absurd.” The reason it doesn’t happen is because of powerful lobbying, but it’s ultimately just a political decision. In all these different ways we have many more instruments to tax people than is widely used. Therefore, a worldwide agreed tax is not necessary and won’t happen. There is little sign of the Ukraine conflict being resolved in the near future, and there are talks of imposing further sanctions on Russia. To what extent are these sanctions affecting the Russian economy? Given the current vulnerability of the European economy, is it wise for us to continue with these measures? We’re in a very difficult position on Ukraine and I feel great sympathy for the policy makers who have to make these decisions. The measures we have taken are certainly painful to Russia, although the fall in oil prices is more so, so we have been quite fortunate in this combination. There are certainly measures we could take which we have not yet taken which would be devastating to Russia. The most powerful of these would be to simply throw them out of the Western banking system, in which case large chunks of their economy would be really badly damaged and many of their companies would be forced into default. These measures are painful and I would guess that in the long run they will be sufficiently painful to force or to make likely a change in policy. But I do stress that is not certain – they could decide to bear them – and it could be quite a few years. We just don’t know.
The sanctions are problematic because they take so long and the war is now, and there is a by-product cost of sanctions which is very important: the more you adopt general sanctions, the more you are likely to strengthen the more xenophobic elements in Russia or any other country you impose sanctions on. They can arrange it, at least to some degree, so that most of the people who feel the pain of the sanctions are relatively powerless people, and this is why it’s very important if you can to target them.
I think we have to respond to Putin ... in a way that says: ‘You are going to pay something, it has to be you and it has to be targeted at the elite. But on the other hand if you back off, we’re very happy to do a deal.’ So it is possible, and in many circumstances it has been the case, that even though they hurt the economy, the political effects are not quite what you want. They actually strengthen the hands of the more malevolent xenophobic powers because they blame everything that goes wrong on the West. It undermines the liberals and the pro-Westerns and the people who are open, the people who are trading, the people who we deal with. They are knocked out of our economy. It undermines the political effectiveness of the argument ‘really we can do business with the West,’ because the West is closing them down. One of the best examples of this was the sanctions on Iraq before the second Iraq war in 2003. Clearly the measures were effective in closing down Saddam’s nuclear weapons programme – there’s no doubt about it – but that wasn’t the sanctions. The sanctions themselves were really quite counterproductive and they had a large adverse effect on the ordinary people, which Saddam exploited very effectively. So sanctions can be very problematic. On the other hand, visà-vis South Africa, they were very effective. This then gets into a very complicated and deep discussion about when sanctions work, what sort of sanctions work, and how that relates to Russia.
The problem we have is that Russia is engaged in behaviour which is very dangerous from our point of view. We have built – so far as we can, not perfectly – the whole post-war European order on the principal that the borders are not changed by force. They can be changed by consent but they cannot be changed by force. So Putin’s behaviour – and he’s clearly fighting a war here, there’s no doubt he’s supplying these people – is one which we cannot fail to respond to. There are lots of people around in Europe who would like to do this (the Hungarians, probably), and we don’t want this game to start because the history of Europe is a history of wars over frontiers. That’s how the first world war started in part, and it’s certainly how the second world war started. This is really dangerous. So I think we have to respond to Putin, and we have to respond in a way that says: ‘You are going to pay something, it has to be you and it has to be targeted at the elite. But on the other hand if you back off, we’re very happy to do a deal.’ The nature of the deal is very clear. We have to agree some borders, the Ukrainians have to accept these borders and Ukraine will be neutral but it can be completely open to the European economy. Finally, can we afford these sanctions? I think the answer is yes. Europe is rich enough and big enough that the purely economic costs of the sanctions are bearable. Of course, if the Russians cut off all the gas it gets quite problematic, but if the Russians do this then their economy will really implode. I’m not saying they’d never do it – they might – but it isn’t fantastically likely. But the simple truth is, the situation we got ourselves into with Russia and they got themselves into with us is very, very worrying. Russia is not a huge economy, but it is a major power. It has one of the world’s largest nuclear armaments and therefore the capacity to destroy the world, and having this relationship with Russia is very disturbing. But I don’t think their behaviour could be ignored. So it’s a very difficult balancing act and I think people like Obama and Merkel who are the main leaders are both extremely cautious people – they are often criticised for being too cautious – and I think they are getting this balance roughly right. The NER would like to thank Mr. Wolf for his time and cooperation.
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Will Robots Take Our Jobs? Manu Hegdekatte (BSc Economics, ‘17, The University of Nottingham)
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long held consensus of the majority .of economists is that technological ..advancement creates more jobs than it destroys. And for a very long time, they have been right. However, this position requires a serious re-think. New technologies are eliminating far more jobs than they are creating with research indicating that we are on the cusp of witnessing job automation causing widespread unemployment. This automation and the accompanying unemployment - is bound to have far reaching effects on our economies and societies. For the most part of the 19th and 20th century, technology was a huge creator or jobs and prosperity. Real income hardly doubled between the start of the common era and 1570. But after that, it tripled from 1570 to 1875. Between 1875 and 1975 real income more than tripled. The need for human capital and labour increased from the onset of industrialisation. In fact, it created enough employment to satisfy the rapidly expanding population of the 20th century. So far the economists who argue for technology creating more jobs and greater prosperity seem to have had the better of the debate. Technological progress has two competing effects on employment; the destruction effect and the productivity effect. In the case of the former, technology is substituted for labour whilst the latter holds that productivity increases attract companies to enter such flourishing industries and thereby create employment opportunities. Historically the productivity effect has been stronger of the two but, as Keynes (1933) pointed out, our discovery of ways to
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economise the use of labour can outpace the rate at which we can find new uses for labour. There are several indications that this replacement has begun and will only worsen. In the last three decades, the share of labour in output has declined from 64% to 59%. Until now the jobs most susceptible to replacement
were those that involved repetitious tasks. However, there have been massive increases in processing power and the availability of information, that is, ‘big data’; computers can now perform complex tasks more efficiently and at a lower per unit cost than human labour. Certain industrial robots can quickly imitate or ‘learn’ a set of human actions.
47% of today’s jobs could be replaced by machines in the next two decades In services, computers often detect fraud more accurately than any number of accountants that are liable to human error. A recent paper by academics at Oxford University predicts that around 47% of today’s jobs could be replaced by machines in the next two decades. Another concern is that even the largest and most prominent of new companies don’t
create as many jobs as in the past. Compare Google who employ roughly 46,000 people to Ford, who at one point employed over 100,000 just in their Rouge Factory. When Instagram, a popular photo-sharing site, was sold to Facebook for about $1 billion in 2012, it had 30 million customers and employed 13 people. In stark contrast, Kodak, a photography company that filed for bankruptcy a few months earlier employed 145,000 people in its heyday. However, many people sit on the other side of the debate. They point towards the past where automation led to more jobs and not fewer. Levy and Murnane (2004) accurately identify that there are still great difficulties in replicating human perceptions such as our ability in spotting and expressing new patterns or to interpret and analyse information. Another argument is that of population. The human population growth rate has been consistently falling and the average age of the world is set to grow older and older. Therefore, the argument is that we will simply need fewer jobs in the future and widespread automation will be a welcome addition to the world. Let us consider the possible impacts of this widespread automation and the subsequent unemployment. The sheer scale of economic and social change cannot be understated. The economy would be highly capital-intensive and those who own it would be earning the subsequent profits. In the same vein, the jobs which require high levels of cognition and thinking would pay far more than they currently do. The difference between the highly-skilled and the layman would become unprecedented. As the gap between the haves and have-nots
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widens, there would be a pressing demand for a greater redistribution of wealth. One such form of redistribution that is growing in popularity is the concept of ‘basic income’, where all citizens or residents of a country regularly receive an unconditional sum of money from the government. However, there is still a lot debate on the effectiveness of the concept and it has only proven to be successful in constrained circumstances. As an increasing number of people find they have more free time, we might see a drastic change in the way of life. The fields of art, entertainment and other forms of creativity would undoubtedly prosper in such a case. Another impact to consider is that on emerging and developing economies. One of the usual paths of growth for developing
countries was through the means of cheap labour. A prime example of this is China, who leveraged their cheap labour costs to become the world’s largest manufacturing power. Now as labour costs in China are beginning to increase, manufacturing appears to be moving to countries such as Vietnam. But, once automation is cheap enough, it will definitely erode this established path to growth. It’s crucial that developing nations consider this aspect as it will have far-reaching consequences on their economies. It may yet be a long time before humans are replaced by robots since we cannot predict a variety of factors such as the rate of technological advancement and the scale at which new careers can be created. However, it is increasingly looking like it’s a question of when and not if we are replaced
by automation. References Anonymous. (2014). The future of jobs: The onrushing wave. Available: http://www.economist. com/news/briefing/21594264-previoustechnological-innovation-has-always-deliveredmore-long-run-employment-not-less. Last accessed 22-03-2015. Frey, C.B and Osborne, M. (2013). The future of employment?: How susceptible are jobs to computerisation?. Available: http://www. oxfordmartin.ox.ac.uk/downloads/academic/ The_Future_of_Employment.pdf. Last accessed 22-03-2015. Levy, F. & Murnane, R.J. (2004). The New Division of Labor: How Computers Are Creating the Next Job Market. Princeton: Princeton University Press. p13-31.
Technological Innovation: This Is Not Yet The End Diana Beltekian (BSc Economics ‘16, The University of Nottingham)
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...he future is now. Although proponents .in opposition to this view - those disillusioned with humanity’s potential to further advance the technological frontier - would argue drastic innovations, such as those borne in the Industrial Revolution and in subsequent centuries, have been exhausted. Will future innovations merely consist of incremental change to what is already common knowledge, or can we expect radical novelties? In the age of the personal computer, and the proliferation of information technology, it is not difficult to imagine that the frontier can be pushed a little further. Looking back at the way in which technological innovations have catalysed reorganisations in the global economy and had long lasting impacts on business conduct, the past provides a useful starting point for gauging the future of technology. Three electrical devices that most people today could not imagine living without would safely include the television, mobile phones, and the personal computer. Although, few could have foreseen the central role these innovations have today; in both a professional and home environment. The first underestimation was television’s ability
to displace the radio. In 1939, the New York Times, a respected news outlet, reported that it was infeasible that television was a serious competitor to the radio. How wrong they were, with the absence of televisions stranger than their appearance in a household.
In 1939, the New York Times, a respected news outlet, reported that it was infeasible that television was a serious competitor to the radio The mobile phone was next. In 1983, AT&T hired a respected consulting firm to forecast the expected number of American subscribers to the mobile provider by 1999. The estimated figure was 1 million. In actuality, this figure was 70 million. These historical underestimations of the impact of new technology need to be kept in mind when viewing current infant technologies in the process of innovation as their full potential is often yet to be realised. To reference Professor Rosenburg of Stanford
University, technological advances require further refinement; these adjustments making utilisation of new technologies feasible in the long-run. The last key technology, the personal computer, has undergone significant improvements since its first conception. From the invention of the microchip in 1972, progressive advancements that led to its eventual commercialisation demonstrate the redevelopments necessary. Accompanying the proliferation of computer technology was also a new framework of operation; a redesigning of the work process. New software was developed especially for businesses working with these systems. Thus, the success and pervasiveness of new technology is dependent on the ease with which it can be adopted, with existing processes at the least needing adjustment, or in more extensive cases replacement. 3D printing is an emerging technology with great economic potential. It is the process by which a three dimensional objective is printed from digitally written instructions. The extensive R&D that has been channelled into
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this previously niche market has yielded promising results for its widespread uptake in the near future. The application of 3D printing in manufacturing industries would be potent. Rather than concentrating production in large-scale factories taking advantage of economies of scale, parts needed may be produced locally.
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Fortunately, the future of 3D printing looks promising; findings of the McKinsey Global Institute estimate 3D printing may yield annual additions of $550 billion to the economy by 2025. In comparison to historical research, this is a bold forecast suggesting 3D printing may yet come to play a central role in the supply chain process of the economy.
The implications of having, say, car parts produced locally would significantly reduce transportation costs. Companies would no longer need to transport these goods; instead, simply sending a digital file to a local 3D printing outlet would suffice. Cost savings are complemented by the greater customisation of the product for the consumer; changes requiring adjusting digital files rather than physical production techniques. Beyond the manufacturing sector, additive manufacturing may feature in health services, and aerospace amongst other sectors. Practical applications of new technology must take into account more than just the chance of innovating as an end in itself. Without any consequential benefits it would serve no economic purpose. Is it cost effective to implement? An increase in productivity that is outweighed by an exorbitant cost leaves the creator no better off in comparison to market competitors. This concern feeds into the probability of whether the firm having successfully innovated can make a profit; an outcome partially influenced by the patentability of the innovation. Without the certainty of establishing a temporary monopoly over this technology, through securing a patent, the chances of making a high profit margin rapidly diminishes.
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have found, will introduce disruptive competitors into the market. Historically and at present technological advances have catalysed economic change through revolutionising working practices. This advancement is most evident in the aftermath of the Industrial Revolution and the widespread adoption of capital that a few decades ago seemed unthinkable. One need not look further than the mobile phone or the laptop; today at the heart of raising labour productivity. As newer capital processes are introduced, the productive possibilities of the economy grow and pave way for further enhancements and leaps in technology.
Indeed, such a prediction may come to fruition with large multinational corporations such as Nike already making use of additive manufacturing in its product prototypes. This industrial printing allows rapid prototyping, with product design adjustments able to be reprinted the same day. In this case, new technology has displaced the previous prototyping process, rendering it obsolete, through providing a faster and cheaper alternative.
3D printing may yield annual additions of $550 billion to the economy by 2025 Additive manufacturing’s full range of capabilities have yet to be discovered but it is likely many companies will introduce it into their supply chain now that developments have made it cost effective and as McKinsey and Company
With information readily available at the touch of the button, it’s only a matter of time before the age of the next technological revolution. References: http://www.econlib.org/library/Enc1/ ComputerIndustry.html viewed 13/04/15 http://www.mckinsey.com/insights/ manufacturing/3-d_printing_takes_shape viewed 13/04/15 https://hbr.org/2013/03/3-d-printing-will-changethe-world viewed 13/04/15 Rosenburg, N. (no date), Innovation and Economic Growth, p.2/3 available from http://www.oecd.org/ cfe/tourism/34267902.pdf viewed 12/04/15
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Fuelling Future Prices: Oil Price & Global Inflation Carlos A. Medel (MSc Economics and Econometrics, ‘15 University of Nottingham)
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il price has been widely recognised .as the driving process behind energy prices (Gao et al., 2014). Moreover, its influence towards the most associable CPI-basket component (Energy CPI) is found to have first- as well as secondround effects on headline inflation by affecting subsequent components. Many mechanisms of unexpected oil shocks’ propagation to specific economic sectors has been analysed in the literature. Many studies also analyse the effects of oil shocks on stock returns, consumer expenditures, and the manner in which monetary policy is conducted (Kilian and Park, 2009; Eldstein and Kilian, 2009; Bernanke et al., 1997).
dynamics.; inflation forecasting literature was no exception. Ciccarelli and Mojon (2010) analyse the role of a global inflation factor when forecasting domestic inflation rates in 22 OECD countries. Their findings suggest this factor plays a significant role in samples predating the commodity prices boom of 2007-8 (and the financial crisis of 2008-9).
Many studies focus on different pass-through measures of oil to domestic prices (Barsky and Kilian, 2002; Chen, 2009; Kilian and Lewis, 2011). As an indicator leading to policy decisions, traditional econometric estimations comprise in-sample estimates. On the other hand, Alquist et al. (2013) summarise literature concerning out-of-sample oil price forecasting and evidence that oil might Granger cause certain price indexes. Nevertheless, most evidence has been collected for industrialised economies. Hence, it neglects the role that some developing commodity-exporting economies may play in global price dynamics. It is worth mentioning that oil—a highly traded commodity across the world—could provide detrimental welfare effects at a country level even when non-market shocks hit a remotely located producer. These effects are independent of country’s development level and are rather based on its intensity of use and substitutability.
Ciccarelli and Mojon’s (2010) analysis is subsequently extended in Medel et al. (2014) in four fronts: incorporating remaining OECD countries, different domestic inflation measures, extending the econometric setup, and a sample span until 2013.3 (in monthly frequency). The results still favour the global inflation factor improving forecast accuracy in around the half of 31 OECD countries. Similar results have been recently confirmed and extended by Friedrich (2014).
Especially since the collapse of Lehman Brothers bank in the US—marking the start of the financial crisis—efforts have been conducted into understanding the many global economic linkages across the world. As a result, new modelling techniques explicitly incorporate a “global dimension” as a new ingredient when explaining domestic
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Fig. 1: The DESARIMA Family
Hence, in an after-crisis macroeconomic scenario a natural question emerges. To what Fig. 2:
extent global inflation and oil prices help to forecast domestic inflation rates? Which of these two global variables provides more valuable information for future domestic inflation rates? In this article I make use of a family of tractable time-series forecasting models to compare the forecast accuracy between an ad-hoc leave-one-out principal component of global inflation—GInf, comprising 52 countries—and the Brent oil price, P(Oil). The results show, roughly speaking, that global-inflation-based forecasts
outperforms those oil-based when predicting at 1- and 12-months ahead. At 24-monthsahead, oil-based-forecasts are better than the alternative. These results suggest a major role for global indicators as the driving process behind domestic inflation, as well as oil prices driving world inflation in the long-run. Econometric setup I compare ten different multihorizon forecasts coming from a family of univariate time-series models introduced by Pincheira and Medel (2015)—labelled DESARIMA. Each of these ten models is augmented with an exogenous variable—either GInf or P(Oil). Then, it is calculated the root mean squared forecast error (RMSFE) statistic for h-months-ahead forecast, h={1,12,24}. A final step involves two subsequent “RMSFE Ratios”: the ratio between the equally-weighted RMSFE achieved with the augmented models over the equally-weighted RMSFE achieved with the baseline specifications. Finally, the Giacomini and White (2006) test (GW) is used in order to provide statistical inference. Models The DESARIMA family of models is fully explained in Pincheira and Medel (2015), and stands for Driftless Extended Seasonal Autoregressive Integrated Moving Average. The idea behind these models is to provide a common framework for timeseries models that have been traditionally used for forecasting with a relative success. This is the case, for instance, of the so-called airline model (Box and Jenkins, 1970), the random walk, and the IMA model for macroeconomic variables. This forecast-producing device exploits two traditional features of CPI: seasonality and stochastic trending. To control for the former, the corresponding frequency-based lag polynomial is included. For the latter, certain restrictions delivering a unit-rootalike specification between the models is
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imposed. Defining by πt the year-on-year CPI inflation and by ft the exogenous factor, the DESARIMA family is:
[See Fig.1] where to be
are parameters estimated, and . The ft variable is constructed as follows. For GInf, and considering the ith out of a total of N=53 countries, it takes the first principal component (Ό) of the πt-set of N-1 countries:
for all j ≠i. Note that this leaveone-out measure differs of that of Ciccarelli and Mojon (2010) when excluding Ό from the country to which forecast is made. The factor is re-estimated every time that an observation is added. The oil-price version of ft is simply the first difference of the Brent oil price, ft = ΔP(Oil).
Nicaragua are omitted due Chile and Mexico belong but are presented as Non precisely because their
to short sample. to both groups, European OECD macroeconomic
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forecast. In this case, it is formally defined as:
[See Fig. 2]
for h-step-ahead comparisons, Ď€th,â„ł where is the forecast of Ď€t+h made at t for horizon Fig. 3: European OECD 1/2. RMSFE Ratio of P(Oil) and GInf (*) h considering methodolog, â„ł={Baselin;GInf;P(Oil)} . “Baselineâ€? refers to the model without incorporating any exogenous factor RMSFEhM. is computed as the equally-weighted average of each M. Naturally, figures below unity imply a better performance of the forecast containing ft ; representing a “predictive gainâ€? of (1-RMSFE Ratio)% compared to Baseline.
performance standards.
outreached
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regional
Giacomini-White Testing Procedure This test is incorporated to provide statistical inference on forecast superiority (one-sided). The null hypothesis consists of , against the alternative NH: đ?&#x201D;ź(dh) â&#x2030;¤ 0, against the alternative where AH: đ?&#x201D;ź(dh) < 0, where: dh = (Ď&#x20AC;t+h - Ď&#x20AC;th,b)2 . The procedure is fulfilled following a one-side . t-type test for đ?&#x201D;ź(dh) with a HAC for
Data As a multihorizon forecast, and the fact that The source of inflation data is the IFS IMF the factor enters into each equation with one Database, while for the Brent oil price is lag, an auxiliary forecast of the ft is used. Bloomberg. The sample spans from 1995.1 Based on their accuracy, the auxiliary forecast Results to 2013.3 (219 observations) in monthly comes from the airline model for both ft. Overall, in almost 90% of frequency. The estimation is made the countries the use of in a rolling scheme with a fixed-size Fig. 4: European OECD 2/2. RMSFE Ratio of P(Oil) and GInf (*) the ft variable improves the window of 100 observations. forecasting accuracy. This is Hence, the first forecast made adverted for both measures 1-month-ahead start in 2003.5 of ft. In 74% of these comprises an evaluation countries GInf outperforms sample of 119 observations. P(Oil) for h=1, 60% for The preferred transformation h=12, and 38% for h=24. for both inflation and oil price deliver a stationary variable [See Fig. 3] according to the Augmented Dickey-Fuller and PhillipsThe results for European OECD countries Perron tests. are presented in Figures 3-4. In four cases The number of analysed countries achieved is 53, pertaining to two groups: OECD and the Centre for Latin American Monetary Studies (CEMLA, from its Spanish acronym). In order to take advantage of the geographical location of these countries, the results are shown separately for four subdivisions: (i) European OECD (23), (ii) Non European OECD (8), (iii) Southern CEMLA (12), and (iv) Caribbean CEMLA countries (10) [in parenthesis: the number of countries]. Belize, Estonia, and
Forecast Accuracy Assessment Forecast ability comparison between both factors is provided by the RMSFE Ratio and GW. RMSFE Ratio This measure is used given its direct interpretation when comparing two point
(Hungary, Iceland, The Netherlands, and Norway) neither GInf or P(Oil) provide any predictive gain for any of the three horizons. When considering P(Oil) this is the case just for the UK and Poland for h=12 and 24. In 74% of these countries GInf outperforms P(Oil) for h=1, 52% for h=12, and 30% for h=24 (favouring P(Oil)). Some remarkable predictive gains with any of the ft are noticed for France, Italy, Luxembourg, Portugal, Spain, and Switzerland.
[See Fig. 4]
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those gains are statistically significant in more The results for Non European OECD are [See Fig. 7] than five of the models. Same figures with depicted in Figure 5. It is suggested that P(Oil) achieve 0, 38, and Mexican and Turkish inflation does not react with neither Figure 5: Non European OECD. RMSFE Ratio of P(Oil) and GInf (*) 38%, suggesting more robust results. of these variables. Major Concluding remarks gains with P(Oil) are To what extent do global observable for Chile, while inflation and oil prices help with for the US, especially at to forecast domestic inflation 24-months-ahead. In 75% of rates? Which of these two these countries ft improves variables provides more accuracy with either GInf valuable information for or P(Oil). However, no big future domestic inflation gains are noticeable with rates? GInf (except for the US). In 62% of these countries GInf By analysing multihorizon outperforms P(Oil) for h=1, forecasts coming from the DESARIMA family 50% for h=12, and 37% for h=24 (favouring Statistical inference is carried out for those for 53 countries there are two adverted P(Oil)). cases in which the RMSFE Ratio is less than major findings. These are: (i) a major role for unity. The results by horizon, h={1,12,24}, [See Fig. 5] global measures of prices when In Figure 6 are presented the Figure 6: Southern CEMLA. RMSFE Ratio of P(Oil) and GInf (*) forecasting domestic inflation results for Southern CEMLA rates (GInf in the short- and countries. Interestingly, P(Oil) in the long-run), and in all cases except Aruba, (ii) that major predictive there is no a role for GInf. gains—i.e. more sensitive to When considering P(Oil), global factors—are inflation this seems to be the case rates of European OECD and for Brazil, Ecuador, Guyana, Caribbean CEMLA countries. Paraguay, Suriname, and These results also provide a Uruguay. Interestingly, quick guide on how current Venezuela—a big OPEC oil global inflationary trends exporter—does not exhibit and oil price forecasts could a major gain with P(Oil). impact domestic inflation. This region seems less prone to incorporate future global References: ALQUIST, R., L. KILIAN, and prices information in their R.J. VIGFUSSON (2013). domestic future inflation. Forecasting the Price of Oil, in Despite these small gains, G. Elliot and A. Timmermann (eds.), in 77% of these countries GInf Handbook of Economic Forecasting, Figure 7: Caribbean CEMLA. RMSFE Ratio of P(Oil) and GInf (*) outperforms P(Oil) for h=1, 65% Volume 2. Elsevier, North for h=12, and 46% for h=24 Holland. (favouring P(Oil)). BARSKY, R. and L. KILIAN (2002). Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative, in B.S. Bernanke and K.S. Rogoff (eds.), NBER Macroeconomics Annual 2001. MIT Press, US.
[See Fig. 6] Finally, in Figure 7 are depicted the results for Caribbean CEMLA countries. In this case it is adverted a major role for the P(Oil) compared to GInf, specially in Costa Rica and Guatemala. In 78% of these countries GInf outperforms P(Oil) for h=1, 78% for h=12, and 44% for h=24 (favouring P(Oil)). No major improvements are noticed for Dominican Republic and Trinidad and Tobago with any factor, which contrast remarkably gains obtained for Barbados and El Salvador.
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BERNANKE, B.S., M. GERTLER, and M. WATSON (1997). “Systematic Monetary Policy and the Effects of Oil Price Shocks”, Brookings Papers on Economic Activity 1. BOX, G.E.P. and G.M. JENKINS (1970). Time Series Analysis. Forecasting and Control. Holden-Day, US.
show that in 19, 23, and 21% of the countries in which GInf outperform baseline forecasts,
CHEN, S.S. (2009). “Oil Price Pass-through into Inflation,” Energy Economics 31(1): 126-133.
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CICCARELLI, M. and B. MOJON (2010). “Global Inflation,” Review of Economics and Statistics 92(3): 524-535. ELDSTEIN, P. and L. KILIAN (2009). “How Sensitive are Consumer Expenditures to Retail Energy Prices?” Journal of Monetary Economics 56: 766779. FRIEDRICH, C. (2014). “Global Inflation Dynamics in the Post-Crisis Period: What Explains the Twin Puzzle?” Working Paper 14-36, Bank of Canada. GAO, L., H. KIM, and R. SABA (2014). “How do
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Oil Price Shocks affect Consumer Prices?” Energy Economics 45: 313-323. GIACOMINI, R. and H. WHITE (2006). “Tests of Conditional Predictive Ability,” Econometrica 74(6): 1545-1578. KILIAN, L. and L.T. LEWIS (2011). “Does the Fed Respond to Oil Price Shocks?” Economic Journal 121: 1047-1072. KILIAN, L. and C. PARK (2009). “The Impact of Oil Price Shocks on the US Stock Market,” International Economic Review 50(4): 1267-1287. MEDEL, C.A., M. PEDERSEN, and P. PINCHEIRA (2014). “The Elusive Predictive Ability of Global
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Inflation,” Working Paper 725, Central Bank of Chile. PEERSMAN, G. and I. VAN ROBAYS (2009). “Oil and the Euro Area Economy,” Economic Policy 24: 603-651. PEERSMAN, G. and I. VAN ROBAYS (2012). “Crosscountry Differences in the Effects of Oil Shocks,” Energy Economics 34(5): 1532-1547. PINCHEIRA, P. and C.A. MEDEL (2015). “Forecasting Inflation with a Simple and Accurate Benchmark: The Case of the US and a Set of Inflation Targeting Countries,” Czech Journal of Economics and Finance 65(1): 2-29.
The Rise & Fall of Online Grocery Shopping Nicole Catling (BSc Economics, ‘15, The University of Nottingham)
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..he death of the weekly shop’ (BBC News, 2014) is a new phenomenon. With busier lifestyle alternatives to traditional shopping has developed in response to changing consumer demand for time saving products and services. Shoppers now expect grocery retailing to organise itself around their lives. Pressure for these traditional stores to change was not driven by discounters but by the 2008 financial crisis and developments in technology (Ruddrick, 2014). This research will attempt to examine the developments in the food retail sector by focusing on the online purchasing method of home delivery.
The grocery retail market is one of the largest industries in Europe valued at €1 trillion in 2013 (SyndicatePlus, 2014). Trends are signifying a transition away from traditional store shopping to online grocery shopping (Keen et al., 2004). Recent studies on the growth prospects of online grocery shopping have focused on the change in consumer behaviour, attitude and intentions towards technological adoption. Although some general determinants have been highlighted, conclusions have lacked empirical substantiation and succinctness. There is therefore scope to investigate further the determinants of this e-commerce revolution and underline potential areas for further research. The delivery of groceries is not a new concept. It was first seen in the form of milk float
deliveries in the early 20th century. Some authors and industry representatives have conveyed that grocery e-tailing is about to become a huge business (for example, Kantar (2012)). Conversely, some supermarket grocers have become more pessimistic of the idea and have held back for reasons that online commerce contracts sales in stores but not the costs associated with them (Kämäräinen et al., 2001). With high sunk costs, supermarkets face unfavorable economics.
Groceries are also perishable products meaning consumers generally prefer to physically examine the quality of the products Four major players who by definition have formed an oligopoly have dominated the UK grocery market over the past decade accounting for a 75% share of the market (Kantar, 2012). Dynamic innovation has allowed consumers to buy groceries online, for collection or home delivery. Burke (2002) states that as consumers have different needs than traditional store consumer’s supermarkets have to incorporate a different format to that previously used. This concept
is altering the way in which supermarkets logistically operate thus creating a new competitive landscape that is attracting scholars. Using the Internet for transmitting data offers new opportunities for increased transactional efficiencies throughout the entire food system. These efficiencies can create value for retailers and consumers. Many shoppers try grocery websites but “get discouraged”, says David Shukri (The Economist, 2013). Several factors seem to hinder the suitability of this product category for e-commerce. Firstly groceries are tangible meaning that a full commercial cycle is unattainable via a network. Groceries are also perishable products meaning consumers generally prefer to physically examine the quality of the products (Ring and Tigert, 2001). Even if one e-grocer may guarantee a superior product such as freshness, consumers will have different preferences. For example one may prefer their fruit ripe and others not. Due to these two characteristics according to Anckar et al., (2002) the business will have to remain local in character because of logistical transport costs. Small virtual start-ups with a local focus and business model unattainable by the large players may have competitive edge to make a profit. As Becker and Stigler state (1977) we shouldn’t explain differences by postulating
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differences in preferences but instead in terms of incentives and constraints. Can prices be competitive or will online grocery shopping ever be cost effective? To aid further in-depth analyse we asked respondents directly who grocery shop online to rate what elements of the experience add to their consumer value when online grocery shopping.
[See Fig. 1] Using a quantitative approach, primary data was collected by an anonymous crosssectional survey. From the data collected we can see that 9% of 53 respondents strongly agree that promotion codes are influential. Online exclusive deals are an attempt to lock consumers into home delivery (The Guardian, 2014). Yet our data indicates that these shoppers are not necessarily budget conscious individuals. Anckar et al., (2002) recognises that price is important but e-grocers do not need to undercut through promotions in order to attract customers as some people are willing to pay somewhat higher prices than normal in order to the reap the benefits in Fig.1. Nonetheless, America’s online grocer Webvan’s mass-market strategy ran under the assumption that the audiences were price sensitive but failed to see that few conceived the benefits and willingness to pay for the service. Webvan’s audience was substantially smaller than the mass-market audience and unable to make a profit they consequently went bankrupt in 2001 (Delaney-Klinger et al., 2003). Customers may value time saving dividends and are therefore willing to pay between 3 to 9 pounds for the service according to our sample. 23% strongly agree that online grocery shopping is a time saving activity. We no longer need to travel to the shops and we can now shop anywhere at anytime. With this faster experience more time is available to complete other activities. Over half of the respondents who agreed time saving was an important factor where below 30 working more than 36 hours per week indicating that this service attracts a high proportion of young professionals. According to Corbett (2001), people are increasingly more stressed for time so online grocery shopping can meet the needs of these specific consumers. If time saving is a main consumer value for adopting the service the individual’s time saving dividend should be superior to the cost of this service.
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However, this is not a common finding; a majority either do not have a preferred preference for time saving dividends or their willingness to pay for the service is to low to warrant a profitable service. Older weekend shoppers, of which are the highest sources of revenue spend more time and money in store and are consequently reluctant to change this method of shopping (Anckar et al., 2002). Many online services are establishing a small regular customer base that is not necessarily profitable since spending as a proportion of total overall sales remain low. Nettimarket in Finland struggled to survive with its small Fig. 1: Percieved Usefulness of Online Grocery Shopping
customer base (Anckar et al., 2002). The Internet strategies suggest that businesses expected an unrealistically large mass market of consumers to perceive time saving as a sufficient motivator. As perceived by weekend shoppers, groceries are everyday necessities therefore most consumers loathe paying a premium (Ankar et al., 2002). 23% of consumers strongly agree that convenience is also an important factor of why they shop online. Convenience is a multidimensional concept. The statistic above suggests people are willing to pay smallinflated prices in order to forgo the disutility of shopping. Supported by Anckar et al., (2002) many customers have a one-stop-shop preference where all the products are bought at one place improving shopping efficiency. People are not facing this physically demanding task. The evidence in terms of reduced frequency of shopping in which 23% strongly agree further supports this. Aylott and Mitchell (1998) conceived shopping to be stressful owing to issues like crowding and queuing which online shopping avoids. Novel items are also available to those in locations with smaller hypermarkets with restricted choice increasing shopping flexibility. Yet, customers who shop for convenience tend to be atypical also (Anckar et al., 2002).
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Theoretically suppliers should be able to compete in an electronically open marketplace. Due to falling average costs from decreases in operational costs and manufacturing internalisation performed by intermediaries, previously a minimum efficient scale could be reached passed on as reductions in prices to customers. Conversely due to the current small customer base of online grocery shopping they cannot offer low prices as investment in cost saving technology will not be utilised according to Anckar et al.,(2002). They are convinced no e-grocer can compete on price due to high order assembly and delivery cost. Kämäräinen et al., (2001) states that due to the high operational costs without investment prices (such as delivery) are unlikely to ever be competitive so that budget conscious consumers will not easily embrace this service. He states that ineffective operations through delivery and picking have used up capital on operating expenses. Therefore to attract the budget conscious away from traditional shopping the business’ need to cut operational costs ‘dramatically and fast.’ Dr Clive Black, head of research at Shore Capital Stockbrokers, states that the service usually costs supermarkets up to £20, around four times the usual charge for the service (This is money, 2012). Practical studies have shown that minor variations of prices and the corresponding consumer behavior can have notable effects on revenues and profits (Marn, et al., 2003) thus some risk averse supermarkets should not dismiss this service. To avoiding online systems is to risk losing grocers potential’ best customers. “It really is a prisoner’s dilemma and you can’t afford not to play,” says Chris Biggs (The Economist, 2013). Tesco’s online service has had a first mover advantage in the UK with a near national coverage at a somewhat reasonable cost through its store-based fulfillment model. This model allowed the business to utilise existing assets by using traditional store pickers. Although this increased volumes fast, costs rose quicker than revenues (Kämäräinen et al., 2001) owing to the restricted picking efficiency in-store. With limited sales they were forced to charge higher prices through delivery. The store structure is specifically designed for display not picking. Ocado, a pure online grocery player has a highly automated distribution center of which required substantial sunk costs. Although this overcomes problems of picking and allows
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for space utilisation and additional labour cost savings, the small consumer base means that there remains low capacity. Consequently overall operational efficiency remains poor. Offering competitive prices with traditional stores has not become a viable option as elements of the distribution chain that used to be carried out by the consumer for free are causing huge costs. Distribution centers can work on the principle of just-in-time and lean manufacturing creating an efficient flow of products through the line. When volume is sufficient and capacity can be exploited these centers could become more efficient than supermarkets. The fact that Tesco is still operating extensions of the existing physical retail businesses is logical at the early stages when storage costs may constitute a greater risk of start up, but can later constrain future growth as the costs become unmanageable. Ring and Tigert (2001) warns that many fail to achieve a comparative advantage over the traditional brick and mortar retailers and fail in developing profitable business models. The UK investors have dramatically overestimated the size of the market for online shopping; as a result very few have succeeded in making a profit. The recession of 2008 marked another unforeseen difficulty for online shopping. Bryan Roberts (Kantar, 2012) stated that the economic model of hypermarkets started to break. We saw a reversal of profits due to behavioural changes, as consumers became what were known as ‘savvy’, shopping in multiple stores due to price wars and switching to the two major discount chains Aldi and Lidl. As consumers look for alternatives to traditional grocery stores, producers are forced into competition with each other for the same consumers so that the market has become highly competitive and abundant in choice. These price-sensitive consumers now demand seamless cross-channel grocery shopping to obtain the best price (SyndicatePlus, 2014). Discounter chains can offer both the speed and efficiency consumers wish to gain when using online shopping by stocking fewer products in large volumes. Online grocery shoppers may face an even smaller consumer base in the future as time saving consumers substitute to these discounters. The future prospect of this venture is not clear; there are equal threats and opportunities.
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From our research customers still tend to show no interest in online grocery shopping; the consumer base is not sufficient enough in size to build their future upon. The problem lies in the fact that online grocery shopping has offered little added value for potential customers in comparison to the traditional method shopper. In order to be successful the online grocery market should be increasing order frequency while at the same time decreasing delivery cost through automation. High costs and low profits make for even thinner profit margins with new competition from discount chains.
UK investors have dramatically overestimated the size of the market for online shopping; as a result very few have succeeded in making a profit The fear is that those who are most likely to use the service already saturate the market leaving a consumer base to small worthy of investment. Conversely this investment acting as a barrier to entry would enable reductions in price to attract more customers that would potentially make the service profitable. In support of this, Ocado after a decade succeeded in making its first pre-tax profit of £7.2m (BBC News, 2015). It is not all foredoomed failure. More time, money and effort needs to be invested in refining the existing types of delivery systems into distribution centers in order to attract those on the margin. References Anckar, B., Walden, P. and Jelassi, T. (2002). Creating customer value in online grocery shopping. International Journal of Retail & Distribution Management, 30(4), pp.211-220. Aylott, R. and Mitchell, V. (1998). An exploratory study of grocery shopping stressors. International Journal of Retail & Distribution Management, 26(9), pp.362-373. BBC News, (2014). The death of the weekly shop. [online] Available at: http://www.bbc.co.uk/news/ business-29442383 [Accessed 6 Dec. 2014]. BBC News, (2015). Ocado reports first annual profit. [online] Available at: http://www.bbc.co.uk/news/ business-31108569 [Accessed 26 Mar. 2015]. Burke, R. (2002). Technology and the Customer
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Interface: What Consumers Want in the Physical and Virtual Store. Journal of the Academy of Marketing Science, 30(4), pp.411-432. Corbett, J. (2001). Is online grocery shopping increasing in strength?. Journal of Food Distribution Research, 32(1), pp.37-40. Delaney Klinger, K., Boyer, K. and Frohlich, M. (2003). The return of online grocery shopping: a comparative analysis of Webvan and Tesco’s operational methods. The TQM Magazine, 15(3), pp.187-196. Kämäräinen, V., Småros, J., Holmström, J. and Jaakola, T. (2001). Cost effectiveness in the e-grocery business. International Journal of Retail & Distribution Management, 29(1), pp.41-48. Kantar, (2012). Online Shopping Intelligence-UK. [online] London: Kantar. Available at: http://www. kantarmedia.co.uk/media/55366/kantar-mediacompete-online-shopper-report-grocery.pdf [Accessed 3 Dec. 2014]. Keen, C., Wetzels, M., de Ruyter, K. and Feinberg, R. (2004). E-tailers versus retailers. Journal of Business Research, 57(7), pp.685-695. Marn, M., Roegner, E. and Zawada, C. (2003). Pricing Products. The Mckinsey Quarterly, 1(3), pp.40-46. Ring, L. and Tigert, D. (2001). Viewpoint: the decline and fall of Internet grocery retailers.International Journal of Retail & Distribution Management, 29(6), pp.264-271. Ruddick, G. (2014). Supermarkets are 20 years out of date, says Waitrose boss. [online] Telegraph.co.uk. Available at: http://www.telegraph.co.uk/finance/ newsbysector/epic/tsco/11178281/Supermarketsare-20-years-out-of-date-says-Waitrose-boss.html [Accessed 26 Mar. 2015]. Stigler, G. and Becker, G. (2010). De gustibus non est disputandum. Idées économiques et sociales, 159(1), p.54. SyndicatePlus, (2014). The State of Online Grocery Retail in Europe. [online] Netherlands: SyndicatePlus. Available at: http://syndicateplus.com/the-state-ofonline-grocery-retail-in-europe [Accessed 3 Dec. 2014]. The Economist, (2013). The raw and the clicked. [online] Available at: http://www.economist.com/ news/business/21590906-grocery-has-so-farresisted-rise-online-shopping-may-be-about-changeraw-and?zid=293&ah=e50f636873b42369614615ba3c 16df4a [Accessed 26 Mar. 2015]. This is Money, (2012). Delivery fee for online groceries may hit £15: Expert’s warning to shoppers. [online] Available at: http://www.thisismoney.co.uk/ money/bills/article-2204908/Delivery-fee-onlinegroceries-hit-15-Experts-warning-shoppers.html [Accessed 26 Mar. 2015].
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The Tragedy of The Greek Economy Oluyinka Olutola (BSc Economics ‘17, The University of Nottingham)
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ince the phrase “Sick man of Europe” was supposedly coined by Tsar Nicholas I of Russia, in 1853, to describe the Ottoman Empire many European countries have been described in the same way, the UK no exception. Now in 2015 no better phrase can be used to describe the Greek economy whose shortcomings have stood out even amongst the beleaguered economies of the Eurozone. Currently the Greek economy stands at another crossroads and in the coming weeks and months the future of its economy for the next generation could be decided. However, in the case of the story of the Greek economy we can presume to better understand it by first looking at the basic problems of the Greek economy before it’s inclusion in the Eurozone; how its membership in the Eurozone has exacerbated the problems within Greece’s economic structure and then we can speculate on the likely future for Greece’s economy and how that may affect us all. First of all an interesting starting point is looking at the state of the Greek economy before it entered the Eurozone in 2001. To be granted entry into the Eurozone, Greece, like all the other potential entrant countries, had to meet certain criteria which included the conditions as set out in the Maastricht treaty. The conditions to be met were that a country’s budget deficit shouldn’t be greater than 3% of GDP and the debt to GDP ratio not more than 60%; Greece, at this point, had a debt to GDP ratio of over double this at 126.4% yet was still granted entry into the Eurozone. An overinflated state wasn’t just a problem for Greece upon it joining the Eurozone but has long been a part of the economic landscape in Greece since the civil war, lasting six years from 1946, with annual salary increases automatically indexed rather than linked to market indicators such as productivity. As well as making questionable decisions relating to public finance, Greece also has a chequered
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past in terms of borrowed credit. Research from economists Reinhart and Rogoff has shown that Greece has spent more time in default than any other European country at 50% of the years between 1800 and 2011; the next worst European offender was Russia at 39%. On the back of such damning economic statistics one has to wonder why Greece was allowed into the Eurozone in the first place. Despite initially being rejected from joining the EU in 1999 Greece’s inclusion only set up the already weak economy for even greater disaster.
When entering the EU, Greece’s debt to GDP ratio was more than double than what was allowed The story of Greece as an EU member state has been a mixed one, to say the least. Greece has benefitted from its membership hugely but there have been many shortcomings too that have hindered, rather than helped, its economy. It can be said that the EU acted as an enabler for Greece as over generous terms for borrowing were offered up to a country that upon its entrance into the Eurozone already had a substantial amount of debt. It’s also been shown, using the Taylor Rule, that the monetary policy set by the ECB was too loose for Greece, fitting more with stronger European economies like that of Germany’s showing that in areas of important macroeconomic policy Greece’s interest weren’t served. As well as Greece being under a monetary system that was unsuitable for its economy it also failed to fully integrate itself into the EU. This diagram shows the negative impact joining the EU had on GDP per person in Greece, the fact that Greece was the only country to experience this effect serves as
evidence of its failure to fully integrate itself into the EU and reap the benefits enjoyed by the other member states. A reason why Greece’s economy is an outlier when set against other EU members could be due to the fact that its EU membership opened up its uncompetitive domestic industries to much stronger EU competition but it should also be noted that Greece enjoyed a growth rate faster than the EU average between 1996- 2008 although the process of integration delayed structural reform until the Eurozone crisis. In the wake of the financial crisis in 2008 the Eurozone was among the most badly affected areas in the developed world. It took until 2009 for the ramifications of the world economic downturn to become visible in the Greek economy, with Greek debt, which rose from €168bn in 2004 to €262bn in 2009, being given a BBB+ rating from Fitch ratings agency. Greece’s fiscal imbalances were only compounded by the global recession with GDP falling by 4.9% in 2010, 7.1% in 2011, 7% in 2012 and 3.9% in 2013. The Greek crisis intensified in 2010 as faced with a staggering public debt Greece was forced to implement severe spending cuts. Despite initially deciding Greece would be given a safety net of €20bn by May 2010 the Eurozone members along with the IMF agreed to give Greece an unprecedented €110bn bailout to keep it in the Eurozone. Unfortunately, one bailout wasn’t enough and the Greek economy was given another lifeline in the form of a second bailout in 2011, gifting the Greeks a further €109bn and helping to allay fears that a Greek default was imminent. In the last couple of years there have been signs of improvement in the Eurozone economy, with the area as a whole returning to growth in 2011 and growth of business activity reaching a seven month high in February 2015 there was even cautious optimism relating to Greece’s long road to economic recovery
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however recent events have plunged Greece back into the uncertainty that surrounded the country as its economy rapidly unravelled in 2009. The election of the left-wing Syriza party in Greece as the dominant faction in the governing coalition, in January 2015, has intensified tensions between Greece and its many creditors as Syriza is keen to alleviate the strain of austerity from the Greek people while Greek’s creditors demand further cuts to help Greece on the way to a long term recovery.
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will default on its loans. Should Greece default on an obligation to one of its debtors, for example the IMF, this could incite a clause that would mean it would also be defaulting on all loans made to it by a series of debtors, such a scenario is unprecedented for a country as developed as Greece and could result in a severe worsening of its fiscal position as debtors would, understandably, be reluctant to lend to Greece. If Greece does, however, compromise and allow further austerity then the Greek economy will continue to shrink making it harder and harder for the government to find the funds to pay back its obligations. These
Greek minister Panos Skourletis was interviewed as describing cuts to pensions and labour protection as unacceptable and elaborated saying, “These are issues linked with our identity and our values.” Skourletis’ views succinctly summarise the deep routed issues of a nation that refuses to come to terms with the reality of the fact that it cannot lavish its citizens with unchecked government spending and expect institutions such as the IMF and other Eurozone countries to foot the bill forever. Greece desperately needs to change its outlook and economic ideals otherwise it’ll continue its trajectory towards economic disaster and even worse turmoil for its already beleaguered citizens. So what does the future hold for Greece? Currently talks aimed at unlocking a new bailout deal for the country have stalled as the Greek government has reached an impasse with creditors over differing views on suitable levels of austerity. Ultimately the future of Greece will seemingly be decided on a game of brinkmanship between it and its creditors and whether the likelihood of a Greece default will spur either party into a significant enough compromise to push a deal through. If the impasse continues it’s likely that sooner rather than later Greece
debt_crisis_Causes_Timeline_and_Bailout_ Programs http://www.academia.edu/8272839/The_Greek_ debt_crisis_Causes_Timeline_and_Bailout_ Programs http://www.theglobalist.com/the-historical-roots-ofgreeces-debt-crisis/ http://www.historytoday.com/matthew-lynn/greekeconomics-drachmas-debt-and-dionysius http://news.bbc.co.uk/1/hi/business/1095783.stm http://www.economist.com/blogs/ freeexchange/2011/07/greece-and-euro http://www.economist.com/blogs/ freeexchange/2014/04/greece http://www.voxeu.org/article/how-poorer-nationsbenefit-eu-membership#fn http://www.telegraph.co.uk/finance/ economics/8580720/Timeline-of-a-crisis-howGreeces-tragedy-unfolded.html http://www.investingreece.gov.gr/ default.asp?pid=16 http://www.bbc.co.uk/news/ business-13856580 http://www.markit.com/Commentary/ Get/20022015-Economics-Eurozonegrowth-hits-seven-month-high-jobcreation-fastest-since-2011 http://www.theguardian.com/ world/2015/feb/21/syriza-greecedebt-deal-eu-alexis-tsipras
are currently tragic and desperate times for Greece as its future is littered with painful adjustment and economic woe whether its submits to pressure from the Eurozone and all others who have financed it for the last 5 years or follows Syriza in demanding an end to austerity , bracing itself for the consequences that would entail.
http://www.wsj.com/articles/fiveyears-after-first-bailout-greece-backon-the-brink-1430504437 http://www.ft.com/cms/s/0/c2a32b4e-f1a2-11e488b0-00144feab7de.html#axzz3Z6F4gzGn http://www.telegraph.co.uk/finance/ economics/11511457/What-happens-if-Greecedefaults-to-the-International-Monetary-Fund.html
Either way it seems as though the economic ideals or, to a large extent, mistakes of Greece will be paid for by generations to come- the ultimate tragedy to befall any economy. References http://www.theottomans.org/english/history/ history1800.asp http://www.academia.edu/8272839/The_Greek_
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What Are The Ramifications of The Slowdown in China’s Economy & What Does The Future Hold For The Superpower? Emily Levin (BA Economics‘17, The University of Nottingham)
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.014 was the first time in 15 years that China missed its official annual growth target of 7.5%. Its growth of 7.3% is still amongst the world’s fastest but the slowdown represents a deliberate strategy by Beijing to deal with the problems caused by the enormous stimulus programme introduced after the 2008 financial crisis. The question is whether China will eventually revert back to its manufacturing intensive economy and cheap labour market that led to extraordinary growth rates in the late 1990s or if this slowdown will lead to a change in China’s economic structure. First of all an interesting starting point is looking at the state of the Greek economy before it entered the Eurozone in 2001. To be granted entry into the Eurozone, Greece, like all the other potential entrant countries, had to meet certain criteria which included the conditions as set out in the Maastricht treaty. The conditions to be met were that a country’s budget deficit shouldn’t be greater than 3% of GDP and the debt to GDP ratio not more than 60%; Greece, at this point, had a debt to GDP ratio of over double this at 126.4% yet was still granted entry into the Eurozone. China’s Historical Impact on the World Economy For many centuries up until the 1800s China (along with India) was regarded as one of the dominant world economic powers. In fact in 1820 China was estimated to account for approximately 33% of world economic output. China’s share of world Gross Domestic Product (GDP) initially was fairly steady, however after the change in dynasty and several wars, China was made poor from isolation and a large fiscal crisis. China was affected economically and politically. There was a shift in focus away from maximising output and China’s share of world GDP fell.
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The emergence of other economies in Europe and the United States also meant that proportionally its output decreased as a share of world GDP. China also had a highly inward oriented economy – the state of not being open to world trade – and its failure to respond
to the increasingly important globalisation of economies dented China’s economic growth. Over the next 100 years or so China grew at a drastically slower rate than the majority of other economies accounting for a mere 1% of world economic output by the mid-1900s. India was suffering from the same downward trend as China. However an apparent economic growth race between India and China started in the late 1940s, around the time India gained independence and adopted democracy and China turned to communism. Given the sheer size of their populations, each had the potential to dominate the global economy. From a similar low base in the 1960s through to the 1990s China’s and India’s GDP per capita were largely the same. Yet by 2013, China’s GDP per capita was 4.5 times larger than India’s although the difference in China’s larger population to India’s in absolute terms shrank from 50% to just 8%. Whilst the World Bank’s latest forecast anticipates that by 2017 India will be growing faster than China, this is a shortterm forecast based on some very specific
circumstances. However both of them remain below the world’s GDP per capita average. In order for them to catch up with the world’s wealthiest nations, continuing on the path that has worked so well for them in the past, such infrastructure projects and adding machines to boost productivity, won’t be sufficient. They will have to react to the emergence of technological innovation through the internet and the development of machines situated in the wealthiest nations which have the potential to sweep away the necessity for a large labour force that both China and India have harnessed in recent times to boost their economic growth. Once that happens growth will depend on demographics and each country’s ability to innovate. China’s authoritarian capitalism is a new model and it’s not clear whether it can produce the sort of environment conducive to people taking risks, forming businesses and innovation generally. China’s system may benefit from its leaders having greater liberty to make hard choices and smooth out rough patches. It could prove to be a better model for catch-up growth too. But managing a thriving, mature economy requires entrepreneurship and innovation. So far India has the upper hand. China Today China has recently set its lowest economic growth target in over 15 years. The Premier of the People’s Republic of China, Li Keqiang, announced a growth target of around 7% for 2015. The government last targeted growth of about 7% in 1999 when China ended up achieving a 7.6% expansion. One of the important factors behind China’s slowdown is that the growth in the labour force - originally thought to be everlasting - is in fact dwindling. The Chinese labour force has
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doubled since 1978 and economists considered this a key factor in China’s explosive growth. But as urbanisation slows and the impact of the one-child policy kicks in, that dividend will gradually diminish. The labour shortage, while a threat to future development, relieves some of the pressure on the government to generate employment. As the scale of the Chinese economy has increased almost fourfold in the past decade, each percentage of growth today is creating twice as many jobs. Therefore, to create a similar number of jobs as it did in 2014 China needs approximately 7% of GDP growth this year. However, a slower expansion is tolerable so long as enough jobs are created. Even after economic growth fell to 7.4% last year the nation created 13.2 million new urban jobs, exceeding a target of 10 million and the previous year’s 13.1 million. Putting China’s growth into perspective, to make the same contribution to global GDP growth Japan would need to expand 14%. The International Monetary Fund (IMF) forecasts Japan will grow 0.6% this year.
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There was also a decline in China’s manufacturing Purchasing Managers’ Index (PMI) in February 2015 which was caused by falling commodity prices, seasonal reasons and weak domestic and international demand. The government’s PMI fell to 49.8 from 50.1 in
December 2014, which is below the 50 level separating expansion from contraction. This signalled the first contraction in more than two years, strengthening the case for China to join the latest wave of global monetary easing. Central banks including those in the Eurozone, Canada and Singapore added monetary stimulus in February 2015 as slumping oil prices dampened the outlook for inflation and global momentum outside the United States. The PBoC may be too busy grappling with the economic slowdown to also contemplate widening the Yuan’s trading band this year.
Neither economic analysis nor data from other developing countries supports potential static growth for China. As other Asian economies, for example South Korea, who follow development strategies similar to China’s, have become richer, their growth rates have gradually come down. This is not a sign of failure but of success. The People’s Bank of China (PBoC), which cut interest rates in November 2014 for the first time in two years, has since added liquidity in targeted measures rather than cut banks’ required reserve ratios, to help improve market and business sentiment. In previous years, high demand for China’s exports boosted monetary inflows resulting in large global imbalances. However, given the muted capital inflows in recent years the course is reversing.
China Tomorrow The Chinese government projects a budget shortfall of 1.62 trillion yuan in 2015. China intends to rebuild rundown urban areas, further railway, motorway and waterway projects in central and western regions, invest in cleanenergy projects and work to modernize agriculture. Total household, corporate and government debt in China, estimated to be 282% of GDP, is a factor fuelling the PBoC’s
concerns that further easing could undermine efforts to rein in borrowing. A slowdown in growth can, however, be seen more positively as a time to encourage reforms to the economic structure, which may have seemed less urgent when growth was more robust. Slowing growth may make such structural reforms more inevitable if China remains focused on boosting its economic strength. Reforms of the financial system, state-owned enterprises and government bureaucracy would also help create an environment that could drive private and individual initiatives, which will likely increase the productivity of China’s industries and the efficiency of its investments. China has achieved high growth in the past because it broke away from rigid collectivism and central planning but additional reforms stalled when the country became complacent. Deep structural changes can only come about when there’s a consensus in China that it would not be able to achieve its growth target following the current path. The forefront of China’s actively changing economy is Premier Li Keqiang’s desires to implement the ‘Made in China 2025’ strategy, seek innovation-driven development, apply smart technology, strengthen foundations, pursue green development and redouble efforts to upgrade China from a manufacturer of quantity to one of quality. There is greater role for private business in the economy, which he said would be further opened up by halving the number of industries in which foreign investment is restricted. Another major factor which will sculpt China’s future is the newly-elected Sri Lankan President Maithripala Sirisena reversing the course and supporting a billion-dollar Chinese port project. The green light for the project highlights China’s determination to secure access to a network of coastal installations across the Indian Ocean. Sirisena
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has supported a US $1.4 billion port city in Colombo on the western coast of the island nation. Colombo Port City is part of one of President Xi Jinping’s signature foreign-policy initiatives: a plan to deepen China’s physical and economic links with neighbours. That includes development of new road and rail links between China, Central Asia and the Middle East - the ‘New Silk Road’. The other half of the plan is a network of commercial port facilities in the Indian Ocean - the ‘Maritime Silk Road’. China is heavily dependent on the Middle East and Africa for energy and natural resources and is understandably anxious to safeguard those vital sea-lanes. Building big, modern ports and other infrastructure will not only boost trade across the region; it is meant to provide a large short-term economic boost for countries on the receiving end. China believes that the Sri Lanka port plan could spur US $13 billion in new investment. These initiatives offer Beijing
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a way to boost its appeal in the region, win allies, transform the China we knew several years ago and expand China’s total economic output potential. Conclusion Overall, the slowdown in China’s growth makes it unlikely that it will ever return to its manufacturing intensive economy that made growth so successful in the 1990’s. A combination of structural reform and excellent work ethics practised during its intensive manufacturing industry history could not only boost China’s total potential economic output further drive China’s global presence. This could provide China with the chance for innovation and invention in industries which other countries currently have dominance in, particularly technology. Ultimately, the future for the superpower looks bright and I believe that the reforms, spurred from the slowdown in China’s growth, are here to stay. References World Bank, http://data.worldbank.org/indicator/
NY.GDP.MKTP.CD, last accessed 03/04/2015 2015, http://www.bbc.co.uk/news/ business-31743423, last accessed 02/04/2015 2015, http://www.forbes.com/sites/ ckgsb/2015/03/16/why-slow-growth-might-actuallybe-good-for-china/, last accessed 02/04/2015 Yao, Kevin, 2015, http://uk.reuters.com/ article/2015/03/30/uk-china-economy-pmiidUKKBN0MQ0CF20150330, last accessed 28/03/2015 Hua, Judy, 2015, http://www.reuters.com/ article/2015/03/05/us-china-parliament-investmentidUSKBN0M102Y20150305, last accessed 02/04/2015 Nicolaci Da Costa, Pedro, 2015, http://blogs.wsj. com/economics/2015/02/04/chinas-total-debt-loadequals-282-of-gdp-raising-its-economic-risks/, last accessed 03/04/2015 Krishnamoorthy, Anand, 2015, http://www. bloomberg.com/news/articles/2015-03-29/howchina-s-li-is-helping-push-railway-profits-to-recordlevels, last accessed 02/04/2015
The Contributions of Experimental Research To Health Economics: Both Past & Future Callum Ward (MSc Economics and Econometrics ‘16 University of Nottingham)
O
ver the last fifty years, economic .research has emerged in two areas that were previously dominated by other schools of study: experimental and health research. On the face of it healthcare appears to be a natural realm for economists to be involved in as it is an area where agents have objectives to maximise whilst facing the constraints relating to the finite nature of health resources. Experiments, on the other hand, are a less natural extension of standard economic theory; the assumptions of rational, well-informed decision makers render experiments redundant, as human behaviour can be predicted in accordance with these assumptions. Due to pioneering work by Kahneman and Tversky and Smith and Wilde, experiments have become an increasingly acknowledged way to challenge and correct
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the assumptions made by standard economic theory. It has become clear that the market for healthcare in many ways falls short of the assumptions of standard economic theory; there exists limited information, complicated principal-agent dynamics and immeasurable variables. Therefore there appears to be scope for experimental research in the field of health economics, as it may be necessary to understand the behavioural implications of this break in economic theory. Analytical and statistical methods in health economics Traditionally the stalwarts of economic analysis are formal models and econometrics. Economic modelling involves making basic assumptions in order to simplify and predict human behaviour whilst econometrics is the use of statistical techniques to examine single variables and determine causality in a complex
and dynamic world. As in other fields, there is a large range of complications within health economics that can be accounted for by the combinations of these two methods. Principalagent problems, for example, have long been modelled successfully using standard economic theory, so much so that it is often included in microeconomic textbooks. In general a principal-agent relationship, is where one individual, or group of individuals, the principal, appoints another, the agent, to achieve some economic end on their behalf; the problem arises if the agent has a different set of goals and incentives and is not fully accountable by the agent. If we were to see general practitioners (GPs) as agents, appointed by the principal, the patient, to administer healthcare then we could theoretically predict the GPs behaviour as long as we knew her constraints, preferences and
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the level of accountability the consumer could demand of her, as for example Goddard et al. have done. Furthermore empirical techniques can be used to test the implication of these models. This is where data is drawn on all variables deemed relevant, and using mathematics the signs and significance of variables in the data can be compared to those predicted by the model. However, in order for these statistical methods to work all of the relevant variables have to be accounted for, that is if, for example, personal attitudes of consumers or doctors affect the outcome of the principalagent dynamic then it has to be accounted for by some variable gathered in the model in order for the estimated effect of other variables to still have meaning. One way to overcome this problem is to use an instrumental variable, a variable correlated with the treatment but uncorrelated with the outcome. In healthcare a common treatment variable is the type of insurance programme where the dependent variable is health outcomes. However, the technique is problematic because these two conditions are hard to satisfy in the realm of healthcare. Experiments, both laboratorial and field, can overcome these problems by administering control through careful randomisation. If different measures are placed on random groups of people, then any statistical difference between the groups is likely due to the difference in measures placed upon them by the experimenter. It is clear from these few examples alone that the powerful tools of traditional economic analysis have made great strides into the understanding of healthcare. However, there are complexities innate in the administration of healthcare that are not currently accounted for using these tools alone, and therefore perhaps there is a need for a more diverse methodology to further understand the subject. A brief overview of the existing experimental literature in health economics In the short but busy history of both fields, there has been a significant utilisation of experimental methods in healthcare research. It is worth noting some of the seminal contributions in the existing literature, in order to consider how experiments may be used in the future.
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Perhaps the most frequent use of experiments in health economics is in the assigning of some sort of rank or monetary value to health outcomes. Traditionally economists rely on market outcomes to assign value to goods and services, however there is rarely if ever a direct, well-functioning market for health services. In what is now most commonly named quality adjusted life years (QALYs), different health outcomes are compared using a variety of experimental methods. Bleichrodt and Johannesson, amongst others, have asked laboratory subjects to compare gambles, time trade-offs and direct ratings against health outcomes in order to rank them. This data can then be used to guide health providers in choosing which procedures to undertake given a limited budget, as is the case with the recent Quality and Outcomes Framework implemented in the NHS since 2004.
one of the problems for an economist in studying healthcare is the potential heterogeneity when comparing different doctor-patient relationships As it is hard for insurers to obtain complete information on all aspects of potential customers’ behaviours and characteristics, moral hazard and adverse selection can prevent an actuarially fair price to be maintained in health insurance markets. This is a problem economically speaking as it means that the market is not functioning correctly and there are efficiency losses, but it is also a problem in terms of methodology as economists face the same information restraints that the market does. To combat this, Rand administered the Health Insurance Experiment (HIE) in a number of US cities, where they randomly assigned households to insurance plans with various degrees of copayments. This meant there was no adverse selection, simply because the customers did not select which plan to be on at all. Therefore any difference in behaviour between each plan could be argued to be because of the nature of the plan, rather than the nature of the individuals assigned to each plan. Data gathered from these experiments has been analysed by several researchers, both initially, such as Leibowitz
et al., Newhouse at al. and Keeler and Rolph and more recently as computer technology has allowed for more sophisticated statistical methods, for example, Zweifel and Manning and Newhouse. All of these studies point towards some level of consumer moral hazard, but the degree of which differs based on income and health status at the start of the trial. As argued in the previous section, one of the problems for an economist in studying healthcare is the potential heterogeneity when comparing different doctor-patient relationships. Often no two cases are alike, and each case differs on many measurable and immeasurable parameters, so it is hard to compare GP referral decisions using traditional economic methods. Earwicker and Whynes overcame this by sending surveys with various health profiles to different Nottingham and Nottinghamshire GPs, and asked them to decide whether, and where, to refer them. In comparing the results they found that different doctors are more likely to refer than others, suggesting that doctors, as well as patients, are responsible for health decisions. They found some evidence for a coherent rank of seriousness amongst the doctors, but argue each doctor has a different ‘cut-off point’ where they choose to refer or not to refer. Arguably the most famous experimental contribution to the field was by Kagel and Roth who used an experimental design to test the effectiveness of Gale and Shapley’s matching algorithm between doctors and hospitals. They used laboratory experiments, to test the algorithm against the algorithm currently being used by the NHS in Newcastle, and a control group with no formal algorithm. The use of experiments allowed them to impose measurable losses for early, or ‘incorrect matches’, and in doing so they found that the Gale and Shapley method reduced inefficiencies against both of the other alternatives. Ways in which experiments can be used in the future Of the four research areas listed above, there are two clear groups between which there is a divergence in the returns to further experimental research. The first group, consisting of research into QALYs and matching mechanisms, arguably have limited returns to be gained from further experimentation, but for very different reasons. The Gale and Shapley algorithm hits a rare trifecta in economics, where there
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is little controversy in saying that it reduces inefficiencies in theory, in the laboratory and in the field. As these inefficiencies cannot be reduced beyond zero, there is little more to be learnt from further experimentation. On the other hand the valuation of health outcomes using experiments has entered a cul-de-sac where each valuation method appears to be reaching consistent results when compared to other experiments using the same methods, but inconsistent results when compared to the other valuation methods. As theory does not suggest which method is more likely to produce accurate valuations, there is not much more that can be done experimentally. Although in both of these fields the scope for further experimentation is somewhat limited, developments in theory and new patterns found in real world data could, and probably will, warrant experimental corroboration if and when they occur. With the second group, research concerned with both producer and consumer moral hazard, experiments have arguably been under utilised. This is for two reasons: the quality of the research already undertaken and the need for more diversity. The HIE undertaken by Rand has thus far contributed significantly to the field, but it has three main shortcomings: it failed to control for producer moral hazard in that seventy per cent of participants reported that their doctors knew which programme they were on; it is dated, as at the time of the experiment US spending on healthcare as a percentage of GDP was 8.2% but it is now double that; and it is unique, meaning there are no other experiments with similar results to test the robustness of the findings. Similar problems exist in Earwicker and Whynes’ study, as it is focused on a very small group of doctors that exist in one of only two institutional set ups so it is hard to generalise their results without further study. Furthermore the response rate of 44.2% leaves room for potential selection bias in their survey, however it has to be said that as the purpose of the research was to prove the existence of differing referral rates and any selection issues do not prevent this, what they may affect is the degree of understanding into the degree and nature of the variance in referrals. Therefore, further research is certainly necessary in the area, and arguably both field and laboratory experiments could be
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significant contributors to that end if used appropriately. Laboratory experiments provide a way to control against a large proportion of the complications in the doctorpatient relationship, such as the unobservable personal characteristics of both parties and differences in information, simply because they can be manipulated using the rules and payoff structure of the experiment.
As emerging economies are beginning to be in a position to instigate their own health care systems, health economics has never been so important However, care has to be taken as it is hard to reduce the degree of importance and heterogeneity inherent in health decisions down to laboratory payoffs or hypothetical decisions. Therefore, perhaps there is a need for an increase in field experiments, similar to the HIE, in conjunction with doctor surveys, such as those used by Earwicker and Whynes, in order to fully understand the consequences of different insurance mechanisms on patient and producer behaviour, even if the researcher will inevitably have to lose some degree of control. As spending on healthcare is increasing in all major developed countries, and the emerging economies are beginning to be in a position to instigate their own health care systems, health economics has never been so important. Specifically it is the dual issue of both measuring and valuing health outcomes, and designing institutions that best maximise these outcomes that is of vital significance. There is a strong case, as argued by Fuchs, that a combination of methodology both familiar and unfamiliar to economists is needed to answer these fundamental questions. Whichever side of this familiarity boundary that experiments fall on, they could represent a significant force in health economics research in the years to come. References Kahneman D., & Tversky A. (1973), Availability: A Heuristic for Judging Frequency and Probability, Cognitive Psychology, 5, 207-332 Smith, V. (1982), ‘Microeconomic systems as an experimental science’, American Economic Review
72, 923-955 Smith V. and Walker J. (1990), ‘Monetary Rewards and Decision Cost in Experimental Economics’, Discussion Paper 90-24 University of Arizona. September, 1-40 Fuchs V. (1999), The Future of Health Economics, National Bureau of Economic Research, Working Paper 7379 1-32 Goddard M., Mannion R. and Smith P. (2000), Enhancing Performance in Health Care: a Theoretical Perspective on Agency and the Role of Information, Health Economics, 9, 95-107 A review of empirical data on principal-agent problems in health economics was undertaken by Freeman (2002) Freeman J., Kadiyala S., Bell J. and Martin D., The Causal Effect of Health Insurance on Utilization and Outcomes in Adults: A Systematic Review of US Studies, Medical are, 46(10, 2008, 1023-1032 Bleichrodt H. and Johannesson M. (1997), Standard Gamble, Time Trade Off and Rating Scale: Experimental Results on the Ranking Properties of QALYs’, Journal of Health Economics, 16, 155-175 Walker S., Mason A., Claxton K., Cookson R., Fenwick E., Fleetcroft R. and Sculpher M. (2010), Value for Money and the Quality and Outcomes Framework in Primary Care in the UK NHS, British Journal of General Practice, 213-220 Leibowitz A., Manning W. and Newhouse J. (1985), The Demand for Prescription Drugs as a Function of Cost-Sharing, Rand Publication Series, 2278, 1-24 Newhouse J., Manning W., Duan N., Morris C., Keeler E., Leibowitz A., Marquis S., Rogers W., Davies A., Lohr K., Ware J. and Brook R. (1987), The Findings of the Rand Health Insurance Experiment: A Response to Welch et al., Medical Care, 25(2), 157-179 Keeler E. and Rolph J. (1988), The Demand for Episodes of Treatment in the Health Insurance Experiment, Journal of Health Economics, 7, 337-367 Zweifel P. and Manning W. (2000) Moral Hazard and Consumer Incentive in Health Care, In: Culyer A. Newhouse J. ed., Handbook of Health Economics, Vol. 1., Elsevier Science B. V., 410-159 Newhouse J. (2004), Consumer-Directed Health Plans and the RAND Health Insurance Experiment, Health Affairs, 23(6), 107-113 Earwicker S. and Whynes D. (1998), General Practitioners’ Referral Thresholds and Choices of Referral Destination: An Experimental Study, Health Economics, 7, 711-722
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Interview
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Andy Burnham: Then & Now Former Home Secretary for the Labour Party Interviewed by Jason Sayer (BA Architectural Studies ‘15, University of Nottingham)
“W
...e’re no longer Kendalites, .or Cooperites, Burnhamites or Corbynites,” new whip Grahame Morris has said regarding Jeremy Corbyn’s election as head of the Labour Party. “We’re Labour united. And the Tories are the real enemy.” At the end of August I got the chance to speak with Andy Burnham as he made a rally at St. Pancras Parish Church as part of his campaign to become Labour leader. During the event he focused on questions about policy as people including myself delved further into the claims made in his manifesto.
Andy Burnham speaking at St. Pancras Parish Curch in August
Given Burnham’s new status as Home Secretary, his opinions on policy will have particular leverage in the new cabinet. Here I try to outline the differences between him and his former counterpart, shedding light on how the Labour party will have to balance out the views of both Corbyn and Burnham. One of my first questions to Andy Burnham was about tuition fees after seeing his proposal of a “graduation tax” in his manifesto. The phrase “graduation tax” sounds very similar to the system we currently have in place. How will your system differ from that? And what will you change about the current education system? I believe in comprehensive education. I will bring forward a new vision to reinvigorate it for the 21st century, based on true parity between academic and technical education. I
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will restore a local role in overseeing schools, rejecting the growing market of free schools and academies.
I take your point, but I hope you take mine. University is a passport to higher earnings and just making it free isn’t necessarily a progressive thing to do because it means other people are losing their tax credits, are then asked to pay for universities and I don’t think personally that is defensible.
over the course of their life in respect of their university education where they don’t have that mill-stone of debt. What I’m gonna do is create a Beveridge-style commission where we ask people to take a thorough look at how we do this and how we have systems of paying for social care and university that are fair across the generations and that gives young people the feeling that they aren’t weighed down at the start of their life. That is the aim. That’s what I want to do so we can be fair to everybody else as well as being fair to university students. I propose a balanced plan where Labour isn’t frightened of using a word we haven’t said in recent times. Tax! Why don’t we bring down the deficit by asking people who can, to pay more tax.
“I believe the way we would have won people over would be to have had a genuine alternative to Osborne’s punishing austerity”
“What do you think are the key policies that separate you and Mr. Corbyn? I pay tribute to [Jeremy Corbyn] for the energy that he’s brought to this race, but I will say that this Labour Party needs somebody that can unite it and because of how I have always supported this party and given my all to this party and been loyal to it I believe i can stand before it on the 13th of September and ask for that loyalty back and bring the party back together. I don’t think we will move forward together if there is a feeling that one side of the party is trying to overthrow another.
I think people should make a contribution to their university education and I think a graduate tax is the fairest way to do it, where people pay a little bit extra on the pay-packet
We do have to move together as a united force, I believe the manifesto I’ve set out can bring that whole party back together to be as one. And I have shown in my career that i
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can take on those Tories from that Dispatch Box. I can’t wait to do it. I will take on those Bullingdon boys as I expect to be facing. I will show Mr. Osborne what a real northern powerhouse looks like. What is your stance on the EU? I am proudly pro-European. I want a distinctive Labour campaign to stay in a reformed EU. To help address demands placed on local communities by immigration, I will push for EU funding to be available to support public services in affected areas. If Labour is to regain power, you will most likely have to win votes from both UKIP and Conservative voters - parties who place immigration as a key concern. How will you respond to this? When a large number of EU migrants arrive in an area in a short period of time, strains are placed on local medical services due to increased translation needs and onto school services, where new students from another country require additional support. If we fail to address these concerns across the EU, we will see a continued rise in antiEuropean sentiment, and the hard-Right political parties which take advantage of these concerns. I believe the European centre-left must find practical answers to these challenges. I propose that additional EU funding be made available for public services in local areas affected by intra-EU migration. Looking back at your role in the past when in government as Culture Secretary, you had considerable influence, especially in terms of the Hillsborough enquiry. Will Labour be different under you? In what direction do wish to take the party in? I think the problem we had at the last election is that we looked like we were just going to do something slightly less severe than the government, than George Osborne. I believe the way we would have won people over would be to have had a genuine alternative to Osborne’s punishing austerity. My analysis is that life has got harder for many people in the 21st century. The challenges have got bigger, but politics has gone the other way. It’s got smaller, it’s been dealing in gimmicks and soundbites. I think people are looking for something bigger. The Labour party is crying out for a bigger vision it can get behind, it can unite
Interview
around, and that’s what I’m offering. But my vision has credibility at its heart. Where this Labour party goes from here is crucial in terms of the future of the left in our country. It is such an important responsibility [labour supporters] all have. I want them to know where my loyalties lie. I went to Anfield in 2009 as Culture Secretary to my city of birth and the place where my family comes from. And I did go that day representing an out of touch government. Worse still, I went representing an out of touch Labour party, it doesn’t please me to say that.
“My analysis is that life has got harder for many people in the 21st century. The challenges have got bigger, but politics has gone the other way. It’s got smaller, it’s been dealing in gimmicks and soundbites” I’m so proud of the many things that we did, but we were a party that hadn’t been listening to our own people, our own grassroots. We were so close to certain vested interests in the media that we couldn’t hear a whole city, a labour city, crying injustice for all of those years. I went there that day that day as someone representing an out of touch government but also as someone who knew how they felt. As an Everton supporter, I was at the other semi-final that day [April 15, 1989] and all my friends were at Hillsborough. I found myself in a difficult situation on that particular day. The question is, [as a politician] what did I do? Did I go back to Westminster to stay loyal to that elite that had said “oh, when are those whinging scousers gonna shut up, move on, there’s nothing there”? Did I continue that? Or was I true to those people that I knew, the people that put me where I am today. the people that embody the best values of our party.
establishment. I represented them, I know what working class representation means. Those are my loyalties, that is what I’m all about. The roots of our party matter to me, the links with trade unions and being true to people who built our party and who have supported it. [End of interview] During my brief discussion with him, it was clear that Mr. Burnham wanted to appeal to Corbyn supporters by advocating his desire for Labour to retreat from its centrist stance and back to its “roots” in trade unionism. It will be interesting to see how his opinions such as those on university fees will clash with Corbyn’s, something the new leader thinks should be free. Aside from tuition fee’s, he didn’t seem keen to outline any other policy issues where he disagreed with Corbyn, something which has perhaps been a factor in him being appointed a key role as Shadow Home Secretary. Burnham I feel will no doubt be a key player in the new cabinet. After losing out to become labour leader for a second time, he is no stranger to the political battlefield, something that has been duly noted by Corbyn. In contrast to Corbyn, the english major from Fitzwilliam college, Cambridge, looks set to have a taming influence in the reformed party in which a record 422, 664 supporters voted for their new leader. Unlike his other labour counterparts such as Chuka Umunna or Yvette Cooper, Burnham hasn’t made any brash statements or refused to serve under the new Labour leader. Instead he has very wisely kept his head down and very quietly moved his way up the party. Who knows, maybe Mr. Burnham will be Labour leader one day - 3rd time lucky? For now, we’ll have to wait and see whether Corbyn either crumbles or conquers, something which only time will tell. The NER would like to thank Mr. Burnham for his time and cooperation.
That city fought red and blue together, side by side, They know what solidarity means. they know how to do dig in and stand together and fight together. I put those people first. I went back to Westminster, I took on that
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In Cigarettes We Trust Qureysh Yunus (BSc Economics ‘16, The University of Nottingham)
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.igarettes. It seems that our love hate relationship with the tobacco industry over the decades has led us to expand the realm of our arguments to a more economic than social one. Simply put, we know cigarettes are bad for us but on the basis of freedom and economic prosperity, tobacco industries might just have found the argument for their existence. This is a global issue with a focus on new, emerging economies but the buck does not stop there. The reality is that the monetary value that tobacco companies pump into an economy, be it in the form of employment, profit, sales tax or lobbying, is unimaginably large. The missing component to current analysis, however, is their impact on regulation and their influence on small, developing countries. By the end of this article, it is hopefully apparent to you that tobacco industries are often times wolves in sheep’s clothing. So why is it that emerging economies are so important for cigarette companies? Research has shown that whilst smoking rates in developed countries continue to fall, the number of adults in developing countries who have taken up smoking have steadily risen. By 2025, seven out of ten smoking related deaths would be from developing countries. No doubt that this higher death rate is due to a host of factors like poor health care but everyone can agree that cigarettes are the main proponent. Nevertheless, getting back to why emerging economies have become a key demographic for tobacco corporations; firstly, safety standards are relatively lax compared to developed countries in both production and consumption with the latter being discussed more, later. Secondly, tobacco plantation and distribution are an important source of income for farmers and workers in the industry. These countries obviously have lower production costs due to both cheaper land & labour. Tobacco industries are capable of seizing this advantage by providing better returns to tobacco farmers than if they were to plant other agricultural products. Evidence
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has shown that this form of crop substitution is hard to prevent with declining prices on many agricultural products. They say that there are two things certain in life, death and taxes. It seems that for smokers, this could not be more true. Rising taxes on tobacco is almost inevitable. Australia has recently imposed a 12% hike every year for four years on cigarettes, which will rake in A$5.5 billion. The UK makes over £12 billion annually from cigarette sales. For smokers, they spend about £3000 a year on cigarettes with 77% of that going to tax. Herein lies the problem though. Whilst taxes are justified in order to cover the adverse health costs of smoking, it actually brings in more than the costs to the NHS for smoking related diseases.
The UK makes over £12 billion annually from cigarette sales. For smokers, they spend about £3000 a year on cigarettes with 77% of that going to tax Taxes are in reality a large source of a government’s budget. For a plant like tobacco to make up 2% of the UK’s budget seems like quite a lot but in some countries, tobacco tax revenue makes up to 8% of a government’s budget! I wouldn’t go so far as to say governments actually want people to keep smoking but their policies on cigarettes hardly seems equitable. Studies have shown that a 10% increase in tobacco taxes increases government revenue by 7%. Clearly, the proportionate reduction in demand does not match the proportionate rise in taxation. Why is this especially bad? Given that smokers have to absorb the brunt of the taxes, it is problematic since a large chunk of smokers around the world are from lowincome backgrounds. In Indonesia, the daily
wage is around $3 with $1 going to cigarettes. Remember that these are consumption taxes that are in no way absorbed by tobacco giants since their product is essentially inelastic in demand. To make things worse, whether or not this increasing burden has led to smokers kicking the habit seems debatable. I previously mentioned employment but there really is more to this side of the coin. One of the constant arguments brought by tobacco companies is their importance in generating jobs. Price Waterhouse concluded that in the US alone, 2.3 million people are dependent on the tobacco industry with an increase in taxation likely to result in laying off workers. In Indonesia, 600 000 jobs mainly as tobacco farmers rely on a booming tobacco industry as well. Be that as it may, that seems to be a hard sell seeing as multiple studies, upon further analysis, argue the contrary. Think about it this way, if you don’t spend on cigarettes, then you would probably spend that money on other retail goods and services that would then lead to the expansion of other industries. Even if individuals save this money, that in itself would involve an industry that employs individuals, namely banks! Research in the UK found that if tobacco consumption was to drop by 40%, smokers who quit would spend their freed expenditure on education and other goods resulting in an estimated net increase of 155,000 jobs in the leisure, entertainment and education industries. The World Bank estimated that tobacco trades are in no way wealth creators but a net economic burden of up to $200 billion in lost productivity and illnesses. To rub salt into the wound, it is estimated that for every job in the tobacco sector, nine lives are lost each year. Regulation has always been a hot topic for economists. Nevertheless, most if not all economists agree on the regulation of socially harmful goods. However the decision on whether or not we should regulate tobacco on the grounds that it impinges on an individual’s freedom is perhaps one for politicians to make. What’s worrying is when politicians
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succumb to lobbying pressure from tobacco giants that could potentially conflict with their obligations to the electorate. Philip Morris International (PMI) has been in perpetual legal battles against governments for decades now and they certainly do not look set to change their ways. The most contemporary case is the recent plain packaging legislation that governments have been pushing to implement in countries like Australia, Ireland and Canada. Plain packaging would prohibit the use of logos and colourful promotional text, leading to all packs being produced in similar colours irrespective of the cigarette brand. Cigarette corporations argue that such legislation would dismantle their branding as labels are reduced to a peripheral role. A good example of this dispute is the one that Australia and Philip Morris International currently find themselves in. In fact, such is the bargaining power of PMI that they are now suing the government of Australia for breaching trade agreements and intellectual property by passing this plain packaging legislation. In Indonesia, 70% of males smoke and such a high rate is down to poor regulation and advertising being literally everywhere. Even in the dirt roads of the country’s rural villages, it’s the one aspect of the Indonesian landscape that remains constant. That there is no minimum smoking age written into Indonesia’s legislation is perhaps appalling to most of us, but barely causes anyone over there to bat an eyelid. Finally in Togo, PMI (whose annual net revenue is almost 20 times greater than Togo’s GDP) was once again involved when they threatened to sue Togo, the 10th poorest country in the world if they introduced graphic imagery on cigarette packets. Bearing in mind that this law is enforced in many countries, such a threat seems almost bullish. So Togo now has to stick with its initial legislation of having written warnings on cigarette packages, which wouldn’t sound too bad if not for the fact that 40% of Togolese adults are illiterate. In the midst of all this conflict lies one unifying factor between tobacco corporations and governments and that is dealing with smuggling. In the UK alone, 16% of cigarette consumption and 48% of hand rolling tobacco consumption comes from smuggling and cross border shopping. This problem is less of
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an issue for corporations since their only real problem is tracking their sales and consumer demand. Smuggling can undermine domestic sales and hurt the local operations of tobacco companies but in the end they still earn revenue from the packs even if it’s then smuggled into another country. For governments, it can be an excise revenue loss in the billions. The Australian government could be losing up to $1.1 billion annually in taxes due to illicit trade. This is the weak point of governments in their battle against tobacco trades. The two main causes of smuggling are plain packaging and taxes. With the latter, the bane of high taxes is that it encourages criminal activity in the form of tobacco trafficking especially from neighbouring countries where the price differences in tobacco are the greatest.
Whilst taxes are justified in order to cover the adverse health costs of smoking, it actually brings in more than the costs to the NHS for smoking related diseases What causes the price differences? Well, taxes. In Ireland, Malaysia and Singapore, high taxes on tobacco goods have been identified as the principal cause of trafficking. As for the former, plain packaging creates an avenue for more accessible illegal tobacco. Why? By removing branding and logos, the packages become more easy to copy and illegal tobacco can be sold under the name of these tobacco giants which means regulation becomes all the more difficult. Cigarettes. Pernicious as they may be there does seem to be some dependency on them. Whether this dependency is unfounded and to some extent inflated by tobacco companies is what I believe needs to come to the fore. You might find yourself disagreeing with this article since it touches not on our choice and rights but on the economics of our choices or at least our past choices that have led us to this point.
important contributors of tax revenues and employment, and maybe giving them leniency will help tackle illegal tobacco. Whichever side you’re on, there can be no doubt that tobacco industries are lying on piles of cash, thanking you, for smoking. References http://www.huffingtonpost.com/2013/07/01/tobaccoindustry-e-cigarettes_n_3453821.html http://www.bbc.co.uk/news/health-27546922 http://www.theguardian.com/society/2015/feb/25/ tobacco-industry-should-be-sued-by-governmentover-smokers-health-costs http://tobaccocontrol.bmj.com/content/8/2/196.full http://www.ash.org.uk/files/documents/ASH_121. pdf http://www.the-tma.org.uk/tma-publicationsresearch/facts-figures/uk-tobacco-marketsummary/ http://www.theguardian.com/uk-news/2014/dec/03/ autumn-statement-tobacco-industry-levy http://www.theguardian.com/society/2015/feb/17/ plain-cigarette-packaging-can-deter-take-up-ofsmoking-studies-suggest http://www.theguardian.com/business/2015/feb/25/ tobacco-giants-settle-smoking-lawsuits-florida http://www.richmond.ac.uk/bne/63_Frank_ Chaloupka.pdf http://www.rctfi.org/resources/India_Tobacco_ Economics_summary_en.pdf http://global.tobaccofreekids.org/files/pdfs/en/ India_tobacco_taxes_report_en.pdf http://www.tobaccoatlas.org/solutions/tobacco_ taxes/excise_tax_revenu/ http://www.bat.com/tax http://cebp.aacrjournals.org/content/16/6/1070.full. html http://ash.org.uk/files/documents/ASH_381.pdf https://www.york.ac.uk/media/che/documents/ papers/occasionalpapers/CHE%20Occasional%20 Paper%2023.pdf
On one hand you have cigarette companies venturing to new lands trying to snap up new customers and causing governments huge medical bills, which we should find morally distasteful since we now know how bad cigarettes are. But on the other, they are
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Would increased Western intervention in Syria be the best course of action? Steven Thavendran (BSc Economics ‘16, The University of Nottingham)
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.ince 2011 Syria has become a warzone. Following on the likes of Tunisia and Egypt it too contributed in the Arab Spring following the wave of many other Middle Eastern countries starting to rebel. In the particular case of Syria there was a split between the Shia sect of President Bashar al-Assad and his followers (who ruled the country) and the Sunni majority of the country that opposed his rule. This initially triggered the civil war. However, unlike many of the other Middle Eastern rebellions this war escalated, bringing in more opponents with different ideological beliefs. Jihadists began to grow in the country bringing about the increased role of ISIS who directly opposed the al-Qaeda jihadists. This created an incredibly calamitous war with several different rebel groups (both politically and religiously motivated) skirmishing with each other and the political power of al-Assad trying directly trying to oppose them all. With the increased contribution of the IS in the Syrian civil war, a US led coalition intervened with airstrikes in an effort to help Kurdish civilians repel assaults. At the moment the US military intervention has been limited to drone strikes however there is much backlash towards Obama’s actions with some believing that more military action is needed whilst others with the polarised view that drone strikes are too far and beyond; rather a non-violent medium is needed to resolve the issue within Syria - a resolution that wouldn’t compromise the lives of many of the innocent civilians still living in Syria (Lucy Rodgers, 2015). Bizarrely in Syria there has not been one side which has acted morally ‘right’ as each side has been reported to have completely neglected human right laws; having participated in torture as well as other offences. Once again chemical weapons have been used raising questions about double standards by the West pertaining to why the users of such weapons have yet to be fully reprimanded by them.
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Though the president denies it, a substantial amount of evidence points to the contrary and provides evidence showing that the President used them against the rebels in the North of the country. This usually would be used to further argue that further intervention is needed to support the rebels.
220,000 & increased military intervention is more than likely to increase the number of casualties However, evidence points towards the rebels having started to coordinate with ISIS. If further intervention was to take place it would beg the question that who should be supported, the ISIS or Jihadist militants who are world renowned for the horrible monstrosities they’ve committed, the rest of the rebels which evidence highly suggest have participated in torturing their victims and having coordinated attacks with the militants, or President Bashar al-Assad known for using chemical weapons and having ostracised the Syrian people (The Economist, 2012). If further military intervention was to happen the US led coalition would most likely have to choose the lesser of two evils and support the Sunni militants- forcing themselves to take a blind eye to their past actions. The Syrian coalition arm would be what most regard as the nearest thing to the morally right side in the war however their altruistic nature is becoming less significant as they truly have very little influence in most of Syria with most of the rebels downright rejecting them as an entity. Despite this the Syrian coalition army have been backed by the Gulf States as well as numerous Western powers. Each side in the civil war have their own retrospective supporters with the Presidents faction gaining heavy support from Russia
as well as Iran and Lebanon whilst the Sunni rebel majority have gained support from Turkey, Saudi Arabia, Qatar and other Arab states along with the US, UK and Francethough allegiances have been shaken after the involvement of ISIS. (Lucy Rodgers, 2015). This further advocates the need for resolvement though political means and not further military intervention which may blow into a full scale pandemonium if the backers were to increase their involvement. Additionally, Western intervention would surely only cause an increase in the death count in Syria. In a country where 220,000 have been killed and almost 15 times as many people have been displaced from their homes, increased military intervention is more than likely to increase the number of casualties in the war (Hummer, 2015). Usually such an action is justifiable if it is expected that Western intervention would bring a quicker end to the civil war but in this case Western intervention has the possibility of further escalating the war, causing an increased number of opponents with even more external backing. This leads to a stalemate in answering whether it would be best for further intervention. Though it is unlikely that al-Assad’s backers will join in the war, ISIS and the general war on terror will most likely further deepen if the West were to increase its involvement in the matter. If this were to occur further intervention would be best course of action as political negotiation will hardly bring the war on terror to an end. Further Western intervention is more so backed by the suggestion that if political forums and negotiation were to have worked surely it would have worked in the four years the civil war has raged on. President Bashar alAssad has held his ground both politically and militarily and responded to the advancements of the rebel army with further bombardment taking full advantage of his larger arsenal when compared to his opponents (Xenakis, 2015). Though reports have claimed that
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his army is starting to falter, his army is still militarily stronger than most of the forces and it is unlikely that military defection would be influenced unlike the similar situation in the Egyptian rebellion. Realistically Syria is an incredibly messy case where the consequences of military intervention are unpredictable, let alone the number of obstacles that block such an action from occurring. Unlike with Gaddafi’s regime President Bashar al-Assad has the support of many strong allies including Russia and Iran who are maintaining their increased involvement in the issue. In addition to this the Syrian civil war has spurned more sectarian violence then the other Arab Spring rebellionsan extremely volatile issue that the Western powers will not risk getting involved deeper in. It would be wishful thinking to believe that only political negotiation would solely bring an end to this rebellion. Hoping for a resolution that will happen immediately and promptly stop the fighting is unimaginable and hoping for a resolution where the side in the right (if there really is one) will win is unlikely. It has become a war of attrition and with time on his side alAssad will likely be able to recapture his lost cities in the North and overcome his opposition if the West restricts their involvement. If there is military intervention to support the Sunni Rebellious force it would tip the balance but it
is unlikely that any country at this point would assist. Intelligence support and further nominal sanctions on Syria are all Western powers are limited to as for the support of the rebels. What is currently being suggested is the creation of safe zones and humanitarian corridors within Syria but realistically it would even be hard for these to come into fruition. President Bashar al-Assad will completely reject the idea of such a thing as these zones will be used as a beachhead for further attacks against his army as well as such zones needing approval from Turkey and the other Arab states. Even if he were to accept, countries would need to protect it which very few would choose to do (Miller, 2012). The rulers of the Western states will choose not to increase involvement anytime soon despite the moral impulse guiding them to. Though military intervention seems to be better than leaving the situation as it is, it is more realistic to assume that the West will continue to restrict their involvement. This war has become bloodied with religious violence and it is unlikely that even if intervention were to occur that this war could easily be stopped without allowing for further violence to occur. The sad but honest truth is that there is a huge humanitarian crisis going on in Syria and it will continue to get worse before it gets better.
References Hummer, L. (2015, February 27). Quick facts: What you need to know about the Syria crisis. Retrieved April 03, 2015, from MercyCorps: https:// www.mercycorps.org/articles/turkey-iraq-jordanlebanon-syria/quick-facts-what-you-need-knowabout-syria-crisis Lucy Rodgers, D. G. (2015, March 12). Syria: The story of the conflict. Retrieved April 2, 2015, from BBC News Website: http://www.bbc.co.uk/news/ world-middle-east-26116868 Miller, A. D. (2012, February 14). Too Many Obstacles Stand in the Way of a Syrian Intervention. Retrieved April 8, 2015, from US News Website: http://www.usnews.com/debateclub/should-the-us-intervene-in-syria-with-militaryaction/too-many-obstacles-stand-in-the-way-of-asyrian-intervention The Economist. (2012, February 21). This house believes that military intervention in Syria would do more harm than good. Retrieved April 2, 2015, from The Economist Website: http://www. economist.com/debate/days/view/810 Xenakis, J. J. (2015, April 8). BASHAR ALASSAD’S SYRIA ARMY SHOWING SIGNS OF COLLAPSE. Retrieved April 8, 2015, from BreitBart: http://www.breitbart.com/nationalsecurity/2015/04/08/world-view-bashar-al-assadssyria-army-showing-signs-of-collapse/
The African Puzzle: Need for Drastic Measures Anmol Khiwal (BSc Economics ‘16 University of Nottingham)
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frica is a continent that holds plenty of .potential in the near future. It is rich in ..natural resources and has over 60% of its population below the age of 25 years. Also, it is one of the fastest growing regions in the world. Private investment is flowing in and has increased to around 20 billion dollars. Remittances are increasing too. Africa has extensive trade links with Europe and China and U.S. companies are also realising the fact that it is a profitable place to invest in. In short, it has an amazing platform to make its way to a better standard of life, have an improved and sustained growth performance and match the rest of the world. Africa shows signs of being
exactly where China and India were a couple of decades ago. From being called Hopeless Africa till ten years back, it’s now being called Rising Africa. A lot is expected from it. But will it deliver? This essay will look critically at the question of aid, why it should never be looked at with scepticism and the responsibility of the developed world towards Africa. It will also evaluate the positives that a world government can bring to this whole scenario, which might be the only short and long term solution to save lives in Africa and the Middle East. Challenges Africa is the poorest continent in the world. It is
well behind Asia and South America and there seems to be no end to its despair. The region faces a large number of challenges right now despite the growth that is happening there. Half of the continent is caught up in civil wars and revolts and there is a big possibility that this will spread to the southern part of Africa as well. There is a huge population increase and therefore the need of well-developed infrastructure to provide better jobs, health facilities, education, etc. is immense. Also, there is a challenge of making proper use of the rich resources that the region possesses. The continent is currently plagued with
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corruption, infrastructure issues and unstable macro economy. People don’t have much freedom in most of the countries in Africa and political leaders seem to be completely uninterested in the present state of affairs. With so much potential yet so many challenges in front of them, can aid help them in getting out of this abyss? Is Aid Helping? Yes and no. Africa gets massive amounts of aid, not only from the West but also from the BRIC nations, and we can definitely see some improvements happening. Health conditions of the people are improving, education levels are rising, mortality rates have plummeted sharply in the last couple of decades, and diseases like AIDS, malaria and tuberculosis have largely been curbed. But all this is like focussing on the symptoms rather than the root cause. Over a quarter of the countries in Sub-Saharan Africa are poorer now than they were in the 1960s. Rights for women and minorities, a free media, and freedom to participate in society and have a say over how the country is run are still unavailable. Infrastructure is weak and discipline is lacking. There are arguments that aid helps in continuing wars, and corruption, and also makes Africa more dependent on the West. In reality, aid can only do so much. It can be nothing more than a facilitator, a catalyst, in the improvement process. It won’t work like it did for countries like Ireland or Spain which were already so well developed. Economic mismanagement and borrowings have made Africa overburdened with debt. So does Africa even deserve the aid that is being showered so generously on it? The Real Question The question is not about whether aid should be given or not. The discussion should be on how to set up an effective and efficient partnership which involves government, donors, private sector, and the common people and how to get the creative juices flowing in Africa by
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the combination of all these factors. Let us be clear on one thing. Developed countries like US, UK, France, etc. could not have been built without Africa’s help. The resources that
Africa has provided in abundance, especially manpower, has made Europe as we see it today. Europe which is highly developed at present owes a lot to Africa. In the bargain, Africa has got even messier after the colonial rule ended. Nathan Nunn, in his article ‘The Long-Term Effects Of Africa’s Slave Trades’, wonderfully captures the fact that European powers that traded slaves from African continent are
Moreover, the political instability and differences brought about by slave trade exist even today and can be seen in the condition of their institutions which are totally corrupt. Daron Acemoglu’s extensive work on the effects of institutions on the performance of a country proves the importance of institutions. Institutions play a major role in the growth of a country. The ability to deal with natural calamities and external macroeconomic fluctuations depends a lot on how strong the country’s institutional structure is. Africa lacks that clearly, which shows in its current situation. Thus we can see that the slave trades and colonisation has done a huge, irreparable damage to Africa which affects them even today. The colonists didn’t just take wealth and resources from the region but have scarred Africa for a long time to come. And therefore it is their duty and responsibility now to not just provide aid to Africa but take a bigger part in the functioning of the continent and dynamically inject resources back into the place. We need to rethink the whole definition of aid. It should be viewed in a much broader sense, i.e., military, monetary, trade, governance, etc. It is time to take an active part in Africa to stop the sufferings of the people there. The Real Problem The problem in Africa lies deep within the system. It lies in the corrupt and extractive institutions and bureaucracy that choke the aspirations of the people. The problem with economic institutions in Africa is that they systematically block the incentives and opportunities of poor people to make things better for themselves, their neighbours and their country.
hugely responsible for the condition that Africa is in right now. The number of slaves traded in Africa between the 14th and the 19th century period is directly correlated with how poor the African economies are performing at present.
The system has rotten down, and needs to be cleaned from within as the governments are oblivious to its peoples’ needs and emotions. The Arab Spring revolution that is taking place in Northern Africa and Middle East is a proof of this. This will slowly but surely spread to the rest of Africa as well. People have started to realize that their freedom is being curbed and are fighting
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against it. People need a capable, democratic government elected through voting which is accountable to them. B ut they hardly stand a chance against governments that are willing to kill their own people and resort to violence to push down the revolts like in Tunisia and Libya. The table below shows the most vulnerable countries plagued by poor performance and corruption where revolts can happen. A classic example of poor governance is Egypt and the level of corruption, freedom of press, etc. that the country has. The way out This is where I believe the idea of world government can really help Africa. So what really is world government? It means all the countries united under one political authority. Many believe that world government is not a good idea as larger the government, lesser the freedom. Some think it would destroy peoples’ aspirations and opinions and introduce a more authoritative mode of governance which would not respect the diversity that the world needs. But we need to realize that all things come with costs and benefits. We just need to develop a model in a way that benefits exceed the costs. What we need is an organisation like the UN, but a bigger and
more powerful one, that develops policies especially for Africa, supports the people in their war against oppressive authorities and gives the power back to the people. Tunisia, Egypt, Senegal, Swaziland etc. have already seen people overthrow their ineffective governments and break well established institutions that were rusting in complacency. But to do this on a large scale and ensuring that this doesn’t happen anywhere else in the world in the future, a more active support of the public against these oppressive governments is needed, a goal that a world government could achieve. It can be a one stop solution for problems such as war and the development of weapons of mass destruction, global poverty and inequality, and environmental degradation. Bill Gates, Microsoft co-founder, who has done large amounts of philanthropy work in Africa and Asia has also noted that UN has failed in achieving its goals and there is a need for a ‘global government’ to deal with the ongoing crisis. But we all need to be wary of its powers. To ensure that this government doesn’t become too powerful and starts controlling other countries, a mechanism needs to be put in place to dissolve it when necessary. Conclusion This article establishes the importance of institutions in Africa and the responsibility of
all the developed nations especially European countries and the US to help them achieve effective and efficient governance that has the people’s support. It also highlights the need for a world government to end the African sorrow. Once a stable political climate is established in Africa, only then can they look to build a strong economic structure that supports investment, and, solid development projects that tackles issues like poverty, law and order, natural calamities, etc. The idea is to make Africa a self-sustained place that, instead of asking for aid, becomes an aid provider itself, which is very much possible given the potential it has. It just needs some care and support from the rest. References Acemoglu, Daron, and James Robinson. ‘The Role of Institutions in Growth And Development’. Review of Economics and Institutions 1.2 (2010): n. pag. Web. Acemoglu, Daron, and James A. Robinson. ‘Persistence Of Power, Elites, And Institutions’. SSRN Journal n. pag. Web. Lu, Catherine. ‘World Government’. Plato.stanford. edu. N.p., 2006. Web. 17 Mar. 2015. Nunn, Nathan. ‘The Long-Term Effects Of Africa’s Slave Trades *’. Quarterly Journal of Economics 123.1 (2008): 139-176. Web.
The NER would like to thank Martin Wolf & Andy Burnham for their time and contribution.
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