The ECU’nomist
The Year of Trump Eureka! Humanity’s Most Important Inventions Unconditional Basic Income in Europe The Return of the Establishment Draghi, Please Turn off the Tap!
March 2017, YEAR 25, ISSUE 2
Monetary Policy in the Absence of Money
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Letter from the Editor
The ECU’nomist, March 2017
Dear readers, 2017 DOES NOT ONLY MARK THE 5TH LUSTRUM OF ECU’92, but also of this magazine. This means the ECU’nomist is 148 years younger than that other world-famous magazine on economics, with a similar sounding name. Nonetheless it is a history to be proud of. In this issue we look back on that history. One of the nice things about such an anthological approach is that we could recycle material that we already had laying around. Therefore, instead of designing an original cover from scratch, Haydn collected all covers of the past 25 years that he could still find and created the mockup that you will find on the front of this magazine. When you arrive at the middle pages, you will find another taste of history. Instead of the traditional photo pages of the foregone period, you will find a compilation of photos covering 25 years of ECUhistory. Few of you will recognize any of the people on most of these pictures, but this overview nevertheless serves as a good reminder of all those things that changed within ECU’92 over the past years, and all the things that stayed the same! But of course, you are also counting on us to bring you up to date on current events. This issue will not disappoint on that front. James will open this issue with a story on a man who will defintely shape the year to come: Donald Trump. James will update you on the first, tumultuous days of his already infamous presidentship. Meanwhile, Haydn will update you on another very important political event: the 2017 presidential elections in France. Will France be another big economy to vote a populist in office? Or will mainstream politics prevail in the form of the liberal candidate Emmanual Macron? As cynism seeems to be synonimous with politics nowadays, we tend to forget that politics is ultimately about ideals. Filippo investigates such an ideal: The idea of an unconditional, European-wide basic income. Of course we tend to think a lot about such kind of institutional provisions that could promote welfare. It should not be forgotten, however, that it is innovation, not institutions, that is the key driver of well-being in our lives. Aleks’s story, ‘Eureka!’ serves as a reminder to that insight. I am glad to write that our call for guest articles in the last issue has not been ignored! This period we publish three guest articles. Daan Rademaker presents a critical review of the ECB’s loose monetary policy. Eni Iljazi is also concerned with an unconventional monetary event: The cancellation of the Rs. 500 and Rs. 1000 bills in India. Lastly, Sebastiaan Tieleman digs into the fundamental reasons that cause countries to develop, and how the abundance of natural resources might influence this development. I hope you will enjoy reading this issue. It is just our first one in the next 25 years to come!
Sincerely,
Sjoerd van Alten
Editor in Chief 1
Letter from the Board
The ECU’nomist, March 2017
Dear ECU’92 member, It is a great pleasure to be able to speak to you again via the Ecu’nomist. I hope you are all passing your exams and enjoying Utrecht student life at ECU’92 activities as well as outside of ECU’92. From my perspective, I can tell you that as the year evolves working at ECU’92 becomes more and more enjoyable.
I personally get really happy seeing people grow individually throughout the year, or even as a whole committee. And I must tell you, I have seen lots of people and committees grow this year. I get really happy seeing people become friends by organizing stuff together or meeting each other at ECU’92 activities. I get really happy seeing people from all different kind of backgrounds enjoying ECU’92 activities, Dutch or International, male or female, whatever or whatever. And at last I also get really excited seeing people getting each other home after too many buckets of vodka were consumed at a Full Moon party. I think the founders of ECU’92 will be very proud when I tell them about it at our lustrum dinner.
With the Lustrum ahead I am starting to think more and more about how ECU’92 has evolved over the past twenty five years. We started off in ‘92 with only 35 members from different social sciences, law, and some other disciplines. The most important thing the members had in common back then was an interest in economics. That is something we share with the members of ‘92 as well I hope, since nowadays almost all of our members are students at the Utrecht University School of Economics. Other things that are unchanged are the core activities that ECU’92 set out in ‘92. We still try to create a social network among economists, improve the quality of education at Utrecht University, reduce the gap between academic theory and practice, and improve the relationship between Alumni mutually.
That is why working at ECU’92, as I mentioned in the beginning, becomes more enjoyable throughout the year. I hope to see you all during the Lustrum activities from 16 until 24 March! Cheers, on behalf of the whole Board,
However, something that was not fully encrypted in the mission statement back in 1992 is one of the things I love very much about ECU’92. That is that at ECU’92 people learn to organize the most amazing activities, all by themselves. There are very few places where you can learn to organize a party for 150-200 people without personal financial risk, where you learn how to allocate a budget of 14000+ euros at a trip, or where you get to be in a board of a professional association with 1500 members, all at a young age.
Jesse Boeve Chair ECU’92
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Contents
The ECU’nomist, March 2017 4
Cover Story
The Year of Trump
8 10
Unconditional Basic Income in Europe The Return of the Man - The Establishment and Emmanuel Macron
Monetary Policy
Beyond Economics
University Life
Exchange Article:
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The Beauty of Kyoto
8 19
The first days of the Trump administration have been tumultuous ones. What more is to be expected during his term?
The World
6 16
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Draghi, Please Turn off the Tap! Monetary Policy in the Absence of...Money?
Eureka! A Look into humanity’s most influential innovations Resource Abundance: A tale of two countries
25 Years of ECU’92! Historical photo pages
Should Europe move towards an unconditional basic income?
Emmanuel Macron, the French former Finance Minister leaves the Élysée in April 2015, will he soon be residing there?
India has cancelled all Rs. 500 and Rs. 1000 bills. How does this policy affect its economy?
The ECU’nomist is published every quarter online, as well as printed in a circulation of 500 for members, patrons and external contacts of ECU’92 | Sjoerd van Alten | James Dunstan | Tim Hadders | Linda Kunertova | Aleksander Tase | | Filippo Ricci | Haydn Wiles | Study Association ECU’92 Campusplein Utrecht T 030-2539680
www.ecu92.nl ecunomist@ecu92.nl Published by Issuu
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The World
The ECU’nomist, March 2017
The Year of Trump James Dunstan
N
OBODY COULD HAVE predicted the mass disruption which is now beginning to characterise the year of 2016, first Brexit and now Trump, just where do we stand as we usher in this new age of political unrest? Since January 20, the world has finally seen the first glimpses of a Trump presidency and already we have much to be worried about. Since being in office, a whole host of executive orders have been signed, the most controversial of these being the “anti-immigration” ban from selected Muslim majority countries. After living in a world that has been ever striving to forget the horrific prejudice and bigotry of our species history, America now digresses into a state of ignorant fear. President Trump justifies the 90-day long ban with the so-called protection of the American people from terror, at the cost of alienating over 1 billion Muslim people across the globe. Ironically, the most high-profile terror attacks of the previous two decades, such as September 11, San Bernardino, and Orlando would all be unaffected by such a restriction upon immigration. In fact, there has been a total of zero deaths in America from terrorist attacks enacted by immigrants from the newly banned countries: Syria, Iraq, Iran, Libya, Su-
dan, Yemen, and Somalia. Syrian refugees fleeing from humanitarian ruin can now forget any hopes of relocating to the US. Incredulously, Trump has not only alienated the outside population, his domestic popularity has also taken substantial knocks since starting his presidential campaign trail. Particularly, his vulgar and derogatory rhetoric towards women has already led to one of the largest protests the world has ever seen. The women’s march on Washington protested some of the newly made policies of president Trump as well as human rights. However, aside from the actual decisions that have already been made, there remains one question which should not go overlooked, Is Donald Trump fit to be president? It seems all too obvious, but the mere fact that Trump is first and foremost known for his business makes him partial to a multitude of conflicting interests. While he can no longer manage his businesses personally, Trump is still owner to a vast corporate empire and this may lead to allocations of injustice. How is he supposed to make unbiased decisions for the wellbeing of the people of America, when his businesses have stakes in other corporations all around the planet. When The Industrial & Commercial Bank of China has an office located inside Trump tow-
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er in New York city, surely the decisions of Trump can be seen as compromised. Another executive order which Trump has signed regards the repealing and replacing of Obamacare, a system setup by the previous president Barack Obama, whose original aim endeavoured to provide affordable health insurance to the low income population of America. Although Obamacare had its flaws and was far from the universal healthcare system that the majority of other western powers provide, the decision to immediately repeal it is anything but smart. Obamacare was imperfect, but at least it signified an end to the cumbersome and expensive healthcare system of the past, instead the Trump administration will completely replace the system, without having any concrete plans as to what it should be replaced with. Making decisions without first obtaining the knowledge of how to execute those very decisions appears to be quite a common mistake of the Trump administration. While the infamous Mexican wall also appeared on the list of executive orders, it cannot be said for certain if it will actually become a reality. Again, the order has been signed without the proper planning. How will America afford a project as extensive as the Mexican border wall? A project not only highly insulting to Mexico, but also seemingly unfeasible, the enormous budget which would be required in order to actually build the wall means that it is unlikely to go ahead into the future. Even if it manages to find the funds, then surely this would
The World
The ECU’nomist, March 2017
only take needed money away from other, much more important projects like the Obamacare replacement or infrastructure. All of these acts are indeed an insult to basic human solidarity, but there exists an even greater threat above all these which is not just linked to America, but to all countries and all peoples. The fact that Donald Trump is a known climate change denier is more detrimental to our future than any other policy he may have stated within his
first weeks of presidency. America is the most powerful country on Earth, it sets the trend for any global affairs or ideologies, If America will not bother itself with reducing its emissions or investing in renewable technologies then why should smaller countries do so. We cannot afford for this ignorance to be propagated, as long as Trump is president this seems like a dream which remains far away from reality. However, there is something that we can do. We cannot allow our current
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reality to be perceived as normal in any regard. It is not normal to close borders during the largest refugee crisis since the second world war. It is not normal for the president of the most powerful country on Earth to talk about women in the abhorrent manner that he does. Democracy can only work effectively if the people are prepared to speak out against such acts. The most dangerous thing in the world right now is to allow Donald Trump to rule without opposition.
Beyond Economics
The ECU’nomist, March 2017
Eureka!
A look into humanity’s most influential inventions Aleksander Tase
W
HEN FACED WITH NATURAL CHALLENGES OR IMPENDING DOOM, there’s one thing that humans can do differently than most animals. Instead of having to rely on raw muscular power (which many of us lack in the first place), or sharp talons and super-hearing, we utilize our raw brain power to handle the task at hand. Humans, in all modesty, are the masters of tools, and for good reason because without them we’re simply hairless, defenseless apes! We have taken this natural art of manipulation into heights chimpanzees can only dream about, changing and adapting the environment to us, not the other way around, expanding possibilities and natural boundaries way past the breaking point. We broke free from our savannah prison, only to encounter new obstacles at every leg of our journey of world discovery. At that initial moment, when one of our ancestors had the bright idea of banging two rocks together to make fire or use a stick and thread to catch fish, at that moment could we consider ourselves breaking free from our evolutionary lineage of proto-intelligence and loin-cloth apparel and into the modern (civilized) society we are part of today. Inventions and discoveries have been the driving force of human economics, social evolution and civilization, fueling capital accumulation and the means for future investment without which, our beloved field of economics would cease to exist. I mean, where would we be without the utter bliss of a machine which magically keeps your food cool and is always lit when you open the door? Drinking warm beer, that’s where! This article will list some of the most important inventions and discoveries which have shaped human history. Think back thousands of years. We used to be hunter-gatherer societies living of the land and managing to sustain ourselves from mammoth meat and wild berries. No wonder we had no time for extra activities such as developing cities and globalized economies. Then one day, a frustrated farmer living in the cradle of civilization between two rivers, Mesopotamia, invented something which made all other inven-
tions possible. A plow! Compared to some of the gleaming, electronic inventions that fill our lives today, the plow doesn’t seem very exciting. It’s a simple cutting tool used to carve a furrow into the soil, churning it up to expose nutrients and prepare it for planting. Yet the plow is probably the one invention that made all others possible. You’re probably wondering why the plow is so important in our history. Quite simply it’s the invention which made possible the existence of a sustainable economy. We live in an economy that started emerging when humans became sedentary, mastered agriculture and started developing infrastructure that would benefit them in the long run, along with economies of scale (think of roads, the alphabet, laws). Originally, humans settled down in regions where they could grow grain (Mesopota mia is one example), because back then, food was the most precious commodity. We then learned to trade with neighboring tribes, exchanging what they had in
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abundance for what was scarce and bam the economy was born. So the plow turned nomadic cave-dwellers into future oriented economists, who could now also think of trade, accumulation and investment as opposed to only how to tackle down the next buffalo. The next major invention in my list is the printing press. Before the printing press was invented, any writings and drawings had to be completed painstakingly by hand. It wasn’t just anyone who was allowed to do this. Such work was usually reserved for scribes who lived and worked in monasteries. Later the illuminator would take over to add designs and embellishments to the pages. In the Dark Ages and Middle Ages, books were usually only owned by monasteries, educational institutions or extremely rich people. Most books were religious in nature. In some cases, a family might be lucky enough to own a book, in which case it would be a copy of the Bible,
Beyond Economics
The ECU’nomist, March 2017
The final object in this list is the simple, sometimes underrated lightbulb. We immediately think of Thomas Edison as the electric light bulb’s inventor, but dozens of people were working on similar ideas in the 1870s, when Edison developed his incandescent bulb. Joseph Swan did similar work in Britain at the time, and eventually the two merged their ideas into a single company, Ediswan. The bulb itself works by transmitting electricity through a wire with high resistance known as a filament. The waste energy created by the resistance is expelled as heat and light. The glass bulb encases the filament in a vacuum or in inert gas, preventing combustion. You might think the light bulb changed the world by allowing people to work at night or in dark places (it did, to some extent), but we already had relatively cheap and efficient gas lamps and other light sources at the time. It was actually the infrastructure that was built to provide electricity to every home and business that changed the world. Today, our world is filled with powered devices than we can plug in pretty much anywhere. We have the light bulb to thank for it. The implementation of an electrical grid made possible a revolution in the way we perceive energy and efficiency. Effectively, all digital and electronic devices today owe their due to the modest lightbulb, which helped turn electricity mainstreamed. The lightbulb can be considered the invention which single-handedly marked the development of what we today consider the “modern world”, with all our handy gadgets and life enhancing gizmos. forget Times magazine or even Harry Potter. Around the late 1430s, a German man named Johann Gutenberg was quite desperate to find a way to make money. During the 1300s to 1400s, people had developed a very basic form of printing. It involved letters or images cut on blocks of wood. The block would be dipped in ink and then stamped onto paper. However, instead of using wood blocks, Gutenberg used metal instead. This was known as a “movable type machine,” since the metal block letters could be moved around to create new words and sentences. With this machine, Gutenberg made the very first printed book, which was naturally a reproduction of the Bible. Soon after a mass socio-economic and cultural revolution began. People understood they could spread information and ideas quickly and efficiently and soon not only the bible was being printed. By 1500, there were some 40,000 different editions with over 6,000,000 copies in print
of books of different fields enabling ideologies and technologies to spread quicker and more efficiently.
“Curiosity killed the cat, but satisfaction brought it back! Our inquisitive nature has defined us as a species and formed the backbone upon which our modern society, and economy, currently thrives in.” 7
Curiosity killed the cat, but satisfaction brought it back! Our inquisitive nature has defined us as a species and formed the backbone upon which our modern society currently thrives in. For every problem we are faced with, we will find 2 solutions and each solution will in turn shape the ongoing process of development. Our economy was born by the simple act of settling down and planting some grain, and from them onwards developed and thrived by means of our curiosity and countless inventions. We tend to take for granted the many complex tools surrounding us every day, but every single one, from a simple plastic bottle to a nuclear plant has cemented itself into history and created the society we live in today. Never kill your curiosity!
The World
The ECU’nomist, March 2017
Unconditional Basic Income in Europe Filippo Ricci
E
UROSCEPTICISM. The decade aged phenomena finally ripened, was forgotten, and eventually turned out rotten. Now, the sheer volume of the populist agenda grows louder and louder. Radicalization, anti-immigration, and anti-Europe sentiment is all we’ve been hearing in Austria, Finland, Latvia, Lithuania and, drum roll please, the United Kingdom. It’s abundantly clear that the migrant crisis in combination with the inequality hangover left from the euro crisis are the roots of these sentiments; but how can we eradicate these issues once and for all? Universal basic income as inevitable as it might turn out to be when the robots take over, but it might turn out to be moral and economic necessity for an increasingly divided Europe. For those who somehow missed basic income, the concept is fairly straightforward: everyone within a given domain receives an unconditional amount of money sufficient for subsistence together with a little extra to fulfill their lives, or as philosophers put it, autonomy. While the idea has some utopian overtones, it has gathered a lot of popularity throughout large part of the political-ideological spectrum. For the Libertarians it’s an autonomy argument–i.e. one which grants people to truly be free in what they want to do–as much as an efficiency one; the current welfare systems plastered in red tape and basic income could cut through it. For the Lefties the argument leans much more on autonomy and equality of opportunity: basic income would eliminate poverty. The only way Universal basic income could be introduced in Europe is through a more integrated Union. The limited monetary tools the ECB and Member States have access to are proving to be ineffective; we all saw the effects of writing loans to Portugal, Spain, and Greece. The price they paid was austerity, cutting wages and increased unemployment. If the goal is to create a more equal Europe, then austerity is, paradoxically, a pull in the opposite direction. The simplest and most effective solution is to create a fiscal union. Increased European integration, similar to what states share in the America, would allow Europe to respond better to asymmetric shocks. Income redis-
“What would you do if your income were taken care of?” in Geneva ad campaign. tribution, through a unified, Universal basic income system would become more streamlined and more responsive. Perhaps the biggest uncertainty for basic income is how Europe’s labour market will respond. The debate is polarized between those who say unemployment will rise due to parasitism off the system, and those who say that it will fall. What is important to keep in mind is that the benefits of basic income should outweigh the worst-case-scenario unemployment levels. Not only will the 122.6 million Europeans (25% of the total population) are on the verge of poverty, but they will also be autonomous and non-excluded from the social privileges that other Europeans are able to share. And while for few, receiving unconditional monthly income may very well mean they can sit at home all day, for a lot of people it promotes their ability to work. A minimum of financial security is needed for social inclusion and labour force participation; and this is what basic income can provide. The main challenge lies in the creation of a centralized fiscal regime. This makes the biggest step towards basic income––i.e. eradicating poverty, populism and inequality––one of national sovereignty for the MSs: are Europeans ready to give up fiscal control over a centralized supranational system? Maybe. This past April, Berlin based Dalia Research surveyed Europeans and showed that 58% of Europeans know about basic income and 64% would vote in favour of the policy, would there be a referendum about it. Only 7% said they would reduce working time, and another 7% would look for another job. The remaining 34% of the people surveyed claimed that basic in-
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come “would not affect my work choices.” As austerity driven inequality is one of the roots of populism, then basic income is the solution. While it’s not immediately clear that unemployment in developed economies is a structural issue rather than a cyclical one; it will become abundantly clear if we wait too long. This doesn’t mean the Wealth of Nations cannot be achieved: increased automation, and efficiencies arising from a smaller portion of the labour force being employed will and can sustain growth. Differences in work ethic between Member States will be reflected in the tax rates and the autonomy granted to people, which is far more important than overabundance. European basic income will result in a more unified, wealthier, and happier Europe, in which 122.6 million people will not have to live paycheck to paycheck.
Guest Article
Draghi, Please Turn off the Tap! Daan Rademaker
S
TARTING IN 2014, the European Central Bank has embarked on a journey of Quantitative Easing (QE). This highly controversial monetary policy tool was deemed necessary to restore a broken Eurozone economy in the face of near zero interest rates. This mass injection of cash, at least 1.1 trillion euros, has led to a surge of cheap credit (or “easy” money) on European financial markets. Draghi and the governing council of the ECB hoped
Monetary Policy
The ECU’nomist, March 2017 this insurgence of cash would reach the real economy, driving up goods prices, to achieve a 2% inflation rate and put Europe back on a stable growth path. However, most of this cheap credit has been most eagerly accepted by financial markets who have been investing it, not surprisingly, on anything but the real economy. All this cheap credit has made its way into the stock market, massively inflating stock prices creating abnormal price increases. Perhaps more worrying, just as before 2008, the cheap credit has made its way into the real estate sector causing again a large appreciation in housing prices. For the sake of the long term sustainability of our economy, the ECB should stop the QE program immediately. It is better for our economy to take the hit of a credit crunch now than wait for a more devastating crash of both the stock market and the housing market in the future. But this seems of no concern to Draghi and the general council, who in their infinite wisdom announced recently that they would extend the QE program from September 2016 to December 2017. Albeit he would lower the monthly purchasing to (only!?) 60 billion euros. Draghi made it very clear that lowering the purchasing was no attempt of the ECB to taper the program more in the future. No, Draghi has reassured us that he will not stop flooding the financial markets with more cheap credit until his inflation target of 2% is reached. Which according to his own prognosis, won’t be reached till 2019, and we currently sit at a meagre 0.7% rate. The implied 2.5 year extension of the QE program will only continue to exacerbate
the already large problems on the European assets market. On the stock market and the housing market QE and its supply of cheap credit have been the fuel for a fast growing bubble. Due to QE, investors have large amounts of cash to invest. Due to very low returns on traditional investments such as government bonds, investors have been buying riskier assets, such as stocks desperately looking for higher returns. There is some shocking evidence from the USA, which indicates the FED’s similar QE programme might have caused almost 93 percent of the entire stock market move since 2008. The S&P 500 is up almost 50 percent compared to the pre-crisis levels. This story is however very similar for the European markets where the German DAX, the French CAC 40 and the Dutch AEX are either above or at the same level as before the market crash of 2008. If we turn to the real estate market, easy money is working in similar ways. In addition to higher yields compared to government bonds, investors also strangely believe the real estate sector is about as safe in comparison. In Germany, house prices have been steadily rising since mid-2009, and are currently up almost 25 percent compared to 2010. Its property market is viewed as a safe-haven investment in an environment of increased uncertainty. However, German house prices have been increasing far more rapidly than rents and incomes, strongly indicating the market is overheating, which makes its housing market a very unsafe long-term investment. This story is similar for the other housing markets in Western Europe such as France and Belgium and indicates
a problem throughout the whole (Western) Eurozone. More disconcerting, there is nothing in terms of real economic growth to account for this large appreciation on both the stock- and housing market. Remember, a speculative bubble is usually caused by exaggerated expectations of future growth. As long as the QE program continues, these exaggerated expectations will not surprisingly escalate further. Most investors seem to take a short term perspective, and in the short term Draghi will keep the money tap running wide open. We should not put our faith in the financial markets to adequately price these aforementioned assets. Instead, we should be wary of their dealings. In the last decade they have been notoriously shortterm oriented. Our political institutions should be courageous and engage in a long-term perspective to ensure that these bubbles don’t accelerate to even higher levels. The Western-European countries should restrain themselves and put more political pressure on the ECB to stop sooner, rather than later. It is better to face the music now, and incur some pain, than to continue this price driving madness. We have seen the consequences of a crash in the housing market, and we should expect our institutions not to make the same mistake again, especially only a decade after one of the biggest economic crises in human history.
DO YOU WANT TO BE PART OF THE ECU’NOMIST TOO?
We are always welcoming guest articles! Are there pressing issues you think people should know about? Any topics related to economics, or which you think (future) economists should find interesting are suitable. Please send your piece to ecunomist@ecu92.nl. Happy writing!
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The World
The ECU’nomist, March 2017
The Return of the Man - The Establishment and Emmanuel Macron Haydn Wiles
‘T
HE WORLD IS RUN BY THE MAN. THE MAN IS EVERYWHERE, THE WHITE HOUSE, DOWN THE HALL…’ proclaims Dewey Finn, Jack Black’s character in School of Rock. Nowadays of course, we don’t hear so much about ‘the man’ but rather the ‘establishment.’ Every politician claims to oppose the establishment and represent a change from continuity, in a way to appeal to the their voters to ‘stick it to the man’ and vote for them. The establishment has become the man. But who really are the establishment? If you’re a conservative, chances are you’ll point to figures like Hilary Clinton or François Hollande as belonging to the establishment. Whilst liberals might argue that President Trump himself, whilst certainly being a political outsider, definitely belongs to the establishment; as a powerful, rich, caucasian male. Clearly the problem revolves around defining the ‘establishment.’ According to the Oxford English dictionary, the ‘establishment’ is: ‘A group in a society exercising power and influence over matters of policy, opinion, or taste, and seen as resisting change.’ Clearly then, your definition of establishment will depend on how you view the current government.
Yet despite the ambiguity, voters, and by extension the media have become fascinated with the term. Maybe the one thing that unites the ever warring tribes of liberal and conservative voters can agree upon in 2017 may be that the establishment is bad, change is good. They just can’t agree who represents which. If we take the current (perhaps conservative) definition of establishment to mean politicians who pursue socially liberal but economically pro-business agendas, then one man who fits this typecast is French presidential candidate Emmanuel Macron. Macron, 39, is the son of middle-class professionals. Raised in Ameins, he attended Paris Nanterre University, later graduating from the École Nationale d’Administration. Once a young civil servant, he reportedly paid around €50,000 to buy himself out of his government contract, thereafter joining the investment arm of Rothschild & Co earning himself a cool €2.4 million in 18 months. In 2012 he was appointed as deputy secretary general by Socialist president François Hollande, two years later he was appointed economy minister. Whilst in this post, Macron carried out sweeping reforms known as the loi Macron intended to boost growth and shake up the over-regulated
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French economy. The bill among other things, relaxed Sunday-trading rules, sold state shareholdings and deregulated many professions such as notaries. The reforms proved so unpopular, that they had to be forced through by decree. Last summer, much to the ire of his Socialist colleagues, Macron resigned to launch his bid for the Élysée. Previously belonging to the Parti Socialiste (PS), Macron chose to launch his own movement: En Marche! defining himself and his movement as ‘neither left nor right.’ In many respects, Macron seems the very definition of both the financial and political establishment. So one would expect his campaign to currently be floundering, battered on both sides by the anti-capitalist left and antiestablishment right. Yet you’d be wrong. If the polls are to be believed (which I know seems naive given the events of 2016, but bear with me on this for just a while) Macron could be heading into the second round, to face Marine Le Pen, knocking out the PS’s Benoît Hamon and Les Républicains’ rightwing candidate François Fillon. It’s a race that ultimately, he could win if those in the centre rally around him to stop Le Pen and the Front National from claiming yet another victory
The World
The ECU’nomist, March 2017 for the populist-right. Certainly Macron’s success is at least partly owed to the current state of the race, with Fillon seemingly sinking fast, due to a scandal that involves him using public money to pay his wife and children for work they allegedly did not do and the PS’s lurch to the left under Benoît Hamon. But to write off Macron as merely a beneficiary of circumstance is to miss the appeal that his movement clearly has amongst many French voters. Macron’s rallies have amazed observers, drawing some 4,000 people in Lille then 12,000 people in Paris, this weekend (4th February) he drew a crowd of 15,000 in Lyon, this is huge by French standards. At these events, Macron, like any candidate in 2017 rallies against the establishment, but here his message differs. Unlike Le Pen or Trump in the US, Macron rails against the political establishment, far more than economic establishment, of which he almost certainly belongs. “We can no longer defend a political system whose practices weaken democracy” cries Macron to the cheers of 15,000 Lyonnais. By contrast Macron’s economic policies
are far more mainstream, yet perhaps not fitting the stereotypical conservative/liberal divide. For example Macron promises to loosen France’s labour laws, whilst boosting spending for schools and hospitals. How then is someone who could be so easily characterised as representative of the economic establishment currently fairing so well? If you believe that Macron is indeed representative of ‘the man’ then you might be tempted to argue that, in the postTrump world, voters might long for a return to the normal establishment, even if it would leave them financially no better off than before. The right-wing press suggests a conspiracy involving powerful supporters behind the scenes, from les Gracques a powerful pro-business centre-left pressure group. An alternative reading though would be to disregard the now typical ‘establishment vs. non-establishment’ model. As we’ve already pointed out, there is no clear and concise definition making it a flawed method of analysing a race. Instead we might look at a couple of key factors to explain
“Perhaps most important to Macron’s success is his movement - En Marche! A political party of sorts, En Marche! states their goal to trancend traditional political boundaries. This message is proving attractive in France, a country that, like the US sees much political deadlock due to a predominantly two-party system.”
Macron leaves the Élysée, 15th April 2015. His fiercely socially liberal message has drawn criticism, such as his recent condemnation of France’s colonial past in Algeria.
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Macron’s sudden popularity. First, Trump’s election proved that, many voters are looking for a rebellion against the political establishment, if not a significant change to the economic system. Secondly in the post-Trump, and perhaps more importantly post-Brexit vote world, Macron espouses a unifying, fiercely socially liberal and unapologetically pro-EU message, which proves very appealing to younger voters, who overwhelmingly oppose right-wing populists and their socially conservative messages. For example, Macron recently offered refuge in France to those turned away by Trump’s Muslim ban. Finally, and perhaps most importantly, to Macron’s success is his movement En Marche! A political party of sorts, En Marche! states their goal to transcend traditional political boundaries. This message is proving attractive in France, a country that, like the US, sees much political deadlock due to a predominantly two-party system. En Marche! has set up 3500 local communities, where members may engage in debate about a range of issues sent down by the movement headquarters. Results from these discussions are then fed back to Paris, eventually helping to form policy. This active feedback loop is a relatively new approach to policy making, and helps draw many different groups into Macron’s campaign, from IT professionals, to blue-collar workers, to university students. In an age when voters seem to detest policy makers in the capital, this helps counter the image of Macron as representative of the establishment. The race is still far too close to call, and we are still 3 months from polling day, so it remains to be seen if Macron can pull it off. Most, quite wisely, will also be wary of the accuracy of opinion polls in predicting elections, and I personally would not right off Le Pen or whomever Les Républicains end up wth as their candiate yet. the world could yet see further victories for the reactionary right. However the French election is definitely one to watch in the coming months, depending on your definition of course, ‘the man’ might well have it stuck to him, whoever wins.
The ECU’nomist, March 2017
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Beyond Economics
The ECU’nomist, March 2017
Guest Essay
Resource Abundance: A tale of two countries Sebastiaan Tieleman
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HE RESOURCE CURSE is an economic theory that states that resource abundant countries tend to have lower economic growth; however, growth varies a lot between the countries themselves. This essay will examine the role of institutions in the resource curse. Do bad institutions cause resource abundant countries to have lower economic growth, and if so, how did these institutions come to be in resource abundant countries? And, do resources themselves deteriorate the institutions of a country? This essay will examine various theoretical arguments and empirical evidence the help us answer these questions. In order to research the issue this essay will take an economic, historic and geographic approach. A tale of two countries To illustrate the questions I will provide two examples of countries that are both very abundant in natural resources, and yet could not have been more different in their economic outcomes. All data used in this essay come from the World Bank Database. The Democratic Republic of Congo is located in central Africa. It is known as one of the poorest countries in the world. Congo’s GDP is $33.1 billion which results in a GDP per capita of 745$ in 2014. Total export in Congo in that same year was 6.7 billion, which is about 20% of GDP. Almost all of these exports are mineral products and metals. This makes Congo very dependent on natural resources. Congo acquires a relatively large amount of wealth from its natural resources. The other sectors in the country, however, appear to be so unproductive that the country as a whole is very poor. Furthermore we have to take into account that the money from these exports mostly benefits a small elite so that for the non-elite Congolese income is lower than GDP per capita. Income inequality in Congo is one the highest in world. Economic growth in Congo has been low in the past decades. It is only recently that has started to increase. The second country that we will look at is Botswana, a Southern African country. Botswana’s total GDP was 15.88 billion in 2014, and GDP per capita about 7000$
almost 10 times higher than in Congo. Exports were almost 8 billion, close to 50% of GDP. 60% of these exports consist of diamonds. Another 22% consists of other mining minerals and metals such as nickel. The differences between incomes in both countries are staggering. And yet, both countries depend heavily on natural resources. Another difference between these countries is the quality of their institutions. Institutions in Congo are very bad. This is portrayed through the corruption which riddles its institutions. The democratic Republic of Congo scores very bad in the world corruption index, even when compared to other African countries. Corruption indicates several things, one of them being bribery, which results in bad law enforcement. Another is low governmental accountability, which results in the fact that public power is exercised to benefit private gains. In fact when it comes to the latter Congo is within the worst 3%. Institutions in Botswana, on the other hand, scores much better in the corruption index. They belong to the top 20% in the world. Institutions and growth What the example of The Democratic Republic of Conga and Botswana shows us is that the natural resource curse is not a simple story. There are many exceptions of countries that ‘escaped’ the curse and have become relatively high-income, healthy economies.
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In this part of this essay we will consider the role of institutions. First of all, it is important how we define institutions. North (1991) provides us with a definition: “Institutions are humanly devised constraints that structure political, economic and social interaction”. In this essay with will mainly consider economic and political interaction. A study that looked at this issue was done by Mehlum, Moene and Torvik (MM&T) (2006). They argue that the role of institutions is very important in determining the effects the natural resource curse. Overall, they find a negative relationship between resource abundance and growth when combining all of the countries together. If however they spilt the countries in two groups, one group with countries that have bad institutions and one group of countries that have good institutions; a negative relationship is found only for the group with bad institutions. How exactly do we explain the relationship between resource abundance, institutions and growth? MM&T provides us with a model. A useful way to think about it is that there are two types of entrepreneurs in every country. Producers and grabbers. Grabbers will try to collect as much of the profits from natural resources for themselves. Producers on the other hand produce goods and contribute more to the economy than grabbers. If institutions are such that being a grabber is very
Beyond Economics
The ECU’nomist, March 2017 Resource abundance can thus be a blessing for countries that have inclusive institutions and a curse for countries that have extractive institutions. Resource abundance will test the institutions of the country. A country with extractive institutions but no resource abundance does not have this problem because entrepreneurs do not have the incentive of becoming a grabber so there will be a bigger number of producers despite the quality of the institutions. Data from Congo and Botswana confirm this theory. For example we can look at
that they allowed for colonizers to implement institutions that where more similar to their own, and more or less inclusive in nature. A reason is that Europeans migrated to these regions often to become farmers. They would also benefit from more inclusive institutions. Central Africa has a tropical climate, which meant that first of all the European way of farming was not suited to that climate. Furthermore, there were all kinds of diseases such as malaria. This made it very unattractive for Europeans to migrate to these parts of Africa. No migration also meant that inclusive institutions
“The natural resource curse is not a simple story. There are many exceptions of countries that ‘escaped’ the curse and have become relatively high-income, healthy economies.” profitable, entrepreneurs have a lot of incentives to become a grabber and, hence, not engage in activities that add value. If institutions are such that the profits from natural resources also benefit producers, then becoming a producer is more profitable. Under grabber favoring institutions, the resource abundance leads to an even higher incentive to become a grabber that lowers production, and, in its wake lowers economics growth. For countries that have producer friendly institutions the opposite is true. More resource abundance leads to more income for the economy. Opposite to the grabber friendly institutions there are no negative effects is this case, since producers also benefit from more resource abundance. The result is economic growth. To make things more concrete; a government that has producer friendly institutions is a government that for example invests money from the resources in education, with the result that productivity of workers increases. Or it invests in security making that the risk of getting your business robbed is smaller. A more general definition of institutions is provided by Acemoglu and Robinson (2012). They make the distinction between extractive institutions and inclusive institutions. Extractive institutions are designed to benefit a small elite at the cost of the majority. Inclusive institutions on the other hand are institutions that are designed to provide maximum opportunity to the majority.
data from 2014 on mineral rents. Which is defined here as the difference between the value of production at world prices and the production costs. For Congo, Mineral rents are 20% of GDP. Assuming that workers are not paid more than what is needed to keep them in production, this means that of all income that is earned in this country of 67 million people, 20% ends up in the pockets of an elite group of resource owners. Mineral Rents in Botswana are only 1.8% GDP. As an example of the difference in producer friendliness of institutions we can examine data from 2014 on the share of armed personnel as a share of the total labor force, which is an indicator for how much the government invests in security. This number is about twice as high in Botswana than it is in Congo. How natural Resources shape institutions So far we have only looked at the causality in the following way: the effect of resource abundance on economic growth under institutional conditions. It is also possible to look at the effect of resource abundance on the quality of institutions. To do so, we first take a historical approach. Jared Diamond provides us with an answer in his book: Guns, Germs and Steel (1997). The key lies in the type institutions that were implemented by the western colonizers because of different climatic zones in Africa. For the more southern regions of Africa the climate was such
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were needed in these parts of Africa. So what was left for Europe in these parts of Africa? The answer brings us back to the topic of this essay: natural resources. The institutions that were implemented in resource rich countries of central Africa were extractive. They centered around extracting natural resource wealth and channeling it back to Europe. When the countries were decolonized around the middle of the 20th century these institutions were still in place and continued by the Africans themselves, the only difference being that the resource wealth was extractive to benefit a small elite of Africans. In Congo the Belgians enslaved the local people and built railroad networks with a view to extract natural resources. For Botswana the story could not have been more different. Botswana has never been a colony but merely a protectorate of the British empire. Which meant Botswana could maintain its autonomy up to some degree, and was ruled by a local King. In addition, a lot of Europeans moved to Botswana to start a life because of its temperate climate. This led to a relatively well-governed and stable country where institutions evolved to become more inclusive. So far we have looked at how natural resources under certain climatic conditions caused extractive institutions to be implemented. We can also take it one step further to see how natural resources can shape the institutions in place. A model to explain this mechanism is provided by again, a paper from Acemoglu and Robinson (2003).
Beyond Economics Consider a group of elite that is the governing party in a country with extractive institutions. For example a dictatorship, income for this elite consists of taxes, but also income from natural resources. Some of this income has to be spent on government expenditures and services. Because of the nature of its institutions, however, the elite will try to allocate a large share of this income to themselves. Now we consider two groups of producers in this country, let us call them X and Y. Group X can make an offer to Y to overthrow the governing group and installing a democracy which is more inclusive and favors them more. If Y agrees to do this, the government is overthrown and a new government will be installed. However because the governing group has acquired a lot of wealth it has the means to make a counter offer to Y, and so to say bribe Y not to agree with X. This way the governing elite can stay in power for a long time and police changes though political change will lag behind. Furthermore the corrupted political system that is part of extractive institutions provides the governing party with an incentive to extract a lot of wealth for themselves in order to keep bribing other political groups. Natural resources can be a curse as well for the political institutions of a country. The systems entrenches itself by the way it is organized, and is so to speak trapped in these bad institutions. Change becomes very hard. This model is very
The ECU’nomist, March 2017 much in line with the history of Congolese dictator Joseph Mobutu, who seized power by overthrowing the Belgian colonizers. Mobutu took enormous amounts of tax, natural resource and foreign aid money to enrich himself, and his family. In total it is estimated that he accumulated $5 billion. He used this money to develop the exact strategy we just discussed. Political opponents were either bribed off, or given important positions in his government, to later be locked up or worse, to make space for opponents. The political system he designed had the sole function of keeping the dictator in power. He could not have done so if he would not have been able to enrich himself with money from natural resources. Concluding Remarks First, we looked at under which institutional conditions the natural resource curse is true and causes low economic growth. Extractive institutions that disfavor producers cause disincentives to become a producer, which means growth will be low. For inclusive institutions that favor producers, government income from natural resources will be invested in a more producer friendly economy natural resources are not a curse but a blessing and cause economic growth. The reason that relatively a lot of resource abundant countries have extractive institutions is that natural resources cause extractive institutions. They caused them to
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be there in the first place (under certain geographical conditions) through extractive colonization. In addition, these countries maintain them in the long run, by providing means to the wrong people. They key for resource abundant countries lies in the type of institutions implemented in the country initially. Countries that started off with inclusive institutions such as Botswana do not experience any of the negative effects of their resource abundance. If, however, because of historical reasons the countries initial institutions were extractive, natural resources both strengthen the position, as well as worsen the negative effects of extractive institutions. Congo seems trapped in its institutions and they, if one were to take a pessimistic view, are unlikely to change. Policies in Congo should focus, on taxing income from natural resources and investing in education, security and infrastructure. Very often, however, the families that own Congolese mines are the same families have seats in parliament. Change can only come from the Congolese themselves demanding political change. The average Congolese’s main concern, however, is how to survive on less than a dollar a day. If one were to take an optimistic view, change in Congo and countries that face similar problems, will be very slow.
Monetary Policy
The ECU’nomist, March 2017
Guest Article
Monetary Policy in the Absence of...Money? Eni Iljazi
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WO THINGS HAPPENED on November 8th 2016. The first, and the obvious, was the soul-crushing degeneration of democratic values, fought for in the past half-century. But I will be focusing on the second. On November 8th, India’s Prime Minister, Narendra Modi, invalidated two of the countries’ highest denominations, the Rs. 500 and Rs. 1000 bills. The unexpected policy move had economists dichotomize into camps (not that they need much of an incentive). To those who feel like the governmental decision isn’t a big deal, here are some numbers that help put things into perspective: The withdrawal of the two denominations amounted for 86% of India’s monetary base. In India, 98% of consumer payments are carried out in cash. One can only imagine the immediate effects resulting from the cash crunch, with huge lines forming at banks, and productivity losses endured to deal with the cash withdrawal. Many national actors lauded Modi’s big bang reform, yet the effects of the policy remain to be seen. So before we try to analyze its results, we might want to look at the motives that drove such a destabilizing move. While many called Modi’s decision a demonetization attempt in India, the almost immediate replacement of the Rs. 500 bill and the introduction of a new Rs. 2000 bill point to the contrary. The PM’s not-so-hidden motive had primarily to do with swiping the Indian economy clean of ‘black money’. Most speeches following the announcement were concerned with corrup-
tion, trafficking and criminal activity. We should bear in mind that not all ‘black money’ is so dark, given it might result by legal but informal activities. India’s economy runs largely on an informal sector, which accounts for 45% of GDP and 80% of employment. As well-intended as the desire to fight corruption and money laundering seems, the policy had far-reaching repercussions in India’s daily economic life. After the invalidation, people were given the option to either exchange the denominations for legal tender, or deposit them in a bank. Whoever presented more than 250,000 rupees had to explain how they earned it and prove that they had paid tax on it (the penalty for unpaid tax amounted to 200% of the amount owed). This cornered black-money holders into either depositing the cash in the legal system, or simply trashing it. Yet, the problem with the informal sector is slightly more complicated than that. Illegal money that results from corruption or tax evasion (Modi’s primary concerns), changes hands at a relatively fast pace and is used for daily consumption or investment, activities that are usually perfectly legal. Furthermore, most Indians with troubling amounts of black money do not particularly stash it under their mattress. Instead, it is well hidden in offshore accounts so there is no pressure to either declare it or burn it. In reality, instead of “busting the bad boys”, the policy mostly inconvenienced poor people for whom these bills were their only savings, and had to chose between a
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day’s work or going to the local bank to exchange the old denomination for newly minted ones. Immediately after implementation, chaos erupted nationwide, farmers were unable to buy their daily inputs, and there was war-like rationing of currency. To throw in a few more numbers, out of its 1,25 billion inhabitants, roughly 12 million pay income tax. That is, 99% of Indians don’t pay income tax, and that is not because only 1% work, it’s mostly due to the informal sector. Another problem presents itself when most of the people employed in the informal sector don’t even have a bank account. A push by the government led to the creation of 175 million new bank accounts between 2011 and 2014. One of the upsides to the new monetary policy so far has been that, as of late December, 15 trillion rupees have been deposited in banks, out of 15.4 trillion outstanding. Put another way, 97% of India’s cash is now legal and in the system, a success rate that by far exceeded the government’s expectations. Whether the move can be classified as a success story remains to be seen. So far, it hasn’t been the smoothest process, despite the government’s attempt to release the cash crunch by substituting it with the new denominations. The supply of new rupee bills has not been meeting its market demand, especially in rural and semi-rural areas. The effects so far include an immediate (temporary) delay of consumption and investment, disrupted supply chains and a loss in labor productivity. Maybe, the positive ones have yet to come.
University Life
The ECU’nomist, March 2017
Exchange Article
The Beauty of Kyoto
Jurien Marcelli
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COUPLE OF WEEKS AGO, as I was wandering alongside the Kamo River in Kyoto, I started to reflect on my journey thus far. Looking at the beautifully changing autumn leaves, I truly realized how lucky I had been to study a semester at Kyoto University. Let me start off with the fact that it is a very prestigious university. Locals are usually very amazed when they find out that you are a student at Kyoto University and love to point out how clever you must be to get admitted. Moreover, for a university with a low percentage of foreign students it has a decent range of English taught courses to choose from. In addition, it is worth mentioning that the English language proficiency of the teachers is a lot better than what was stated to me prior to my exchange. Sadly enough, the same cannot be said about the level of English of the Japanese students. Depending on the courses you pick, the study load can vary greatly. A lot of the courses are basic, while only a few of the courses are more advanced. Those more advanced courses have practically the same workload as courses offered at our study. The lack of advanced courses can make it somewhat
hard to find enough interesting courses that are also challenging. Overall, I would say that the study load is lower than in Utrecht. Besides the education, the university also provides a variety of relatively cheap dorms and last, but definitely not the least, Kyoto itself has many great attributes. Kyoto is one of the biggest cities of Japan as it has close to 1.5 million inhabitants. Moreover, it is the most cultural city of Japan with a great range of Japanese food, green and temples almost everywhere. Of course everybody knows Japan for its sushi and ramen, which are both delicious, but there is more. My favourite Japanese dish is ‘Okonomiyaki’. This is basically a thick pancake with a lot of ingredients like shrimps, octopus, squid and vegetables. The first time I ate it, I did not know what to expect. However, when I took my first bite I realized it was one of the best things I had ever eaten. ‘Takoyaki’ is a close second. The first time I saw a ‘Takoyaki’ I thought it was a ‘poffertje’. So I was quite surprised when it was not sweet and even chewy as it had an octopus inside. However, the more I ate ‘Takoyaki’ the better I liked it until I reached the point that I started loving it.
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Okonyomaki Mass-tourism is probably the only downside of Kyoto as this means a loss of tranquillity at certain scenic spots in the city and at some of the beautiful temples that Kyoto harbours. A downside of Japan in general is that most tourist attractions, including the temples, close at 5pm already. This could be one of the reasons as to why the nightlife in Japan starts so early, which is absolutely perfect for when you have to start the next day at 8.45am. So let me take you through a typical Japanese night out on a regular weekday. Japanese people most of the time meet up at an ‘Izakaya’ around 8pm. ‘Izakayas’ are Japanese pubs. Usually, you go sit at a table and decide which kind of ‘Nomihodai’ you want. ‘Nomihodai’ means all you can drink for
University Life
The ECU’nomist, March 2017
a fixed set of price and time. The cheapest ‘Nomihodai’ is roughly €13,- for 2 hours and only contains mixed drinks, while the more expensive is roughly €20,- for 2 hours and includes all beverages, including beer, which is considered a more special drink in Japan than it is in Europe. After your ‘Nomihodai’ is over, you often will check out another ‘Izakaya’ or you might even decide to do some karaoke before taking the last train back home around 12pm. That is at least the case for Japanese people as the exchange students most of the time go clubbing afterwards. The clubs most of the time stay open until the first trains start riding again.
Besides that I also visited other cities in Japan and I even went abroad to Seoul, South Korea. I am still planning on visiting the North of Japan and/or Taiwan. Like I said in the beginning, the workload does not necessarily have to be more than it is in Utrecht and with good scheduling you will have plenty of time to travel or to even write an article for the ECU’nomist. Even if this particular set of city and university does not appeal to you, I would still highly recommended going on exchange somewhere else as this is the best decision I ever made in my life. Dare to live!
During my stay in Kyoto, I was able to visit a variety of cities in the Kansai area.
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The ECU’nomist, March 2017
Jouw studievereniging wil het je zo voordelig en makkelijk mogelijk maken. Dus hebben ze een boekenleverancier die daarbij past.
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