The Ricardian (July 2010)

Editorial Board Abdur-Razzaq Ahmed Hakim Bahri Chief Editors Sebastian Hicks Maximillian Melsa James Pepper Lourenzo Selvadurai Editors Abdur-Razzaq Ahmed Designer Economics Division Tiffin School Kingston-Upon-Thames KT2 6RL

The Ricardian Magazine Issue 1, July 2010

Why

Ricardo?

Ricardo is the economist most identified with the importance of trade in economics, arguing that free trade will lead to benefits for all. Whether or not you believe Ricardo, we are living in a world when trade is increasingly seen as the way for countries to grow out of poverty.

India, China and Africa are recording impressive growth figures backed by a trade based development model. The idea of inter-connectivity underpins Ricardo‘s theories and with the rise of the behavioural economists we are seeing this inter-connectivity more and more at the micro-economic level. It is this scope which provides us with a focus for the Ricardian magazine and you can see the idea of inter-connectivity in the behaviour of the investment banks and the hedge funds (Pg 10), you can see it between the goal keeper and the penalty taker (Pg 18) and you can see it in the behaviour of risk seeking entrepreneurs and the returns they receive.

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News 5

Front cover The Sage Gateshead building in Newcastle at sunset. The sage was designed by architect Norman Foster, and it represents the urban regeneration project along the banks of the River Tyne. Photograph taken by blogger ‗19sixty3.‘

United States of Europe?

The influence of the Euro

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UK Interest rates Latest Interest Rate news

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China’s Boom Busting?

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Africa

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Middle East

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Oceania

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Asia: Japan

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Europe

Recent Lectures 10

The Crisis We thought bankers were the only people to blame, but the problem was far worse as Dr. Gary Van Vuuren describes, page 12. The Ricardian explains why the crisis was not a surprise and the crucial role of behavioural economics, page 10.

Why the 2008 financial mort gage crisis should not have come as a surprise An insight from behavioural economics

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Special Interview: Dr. Gary Van Vuuren

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How to fix broken states The century of emerging markets

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Economics– a risky business?

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The Perfect Penalty

Contents continues overleaf >

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Ocado To buy or not to buy; that is the question

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Paj Holden: Simply brilliant

Special Reports 23

Environmental Economics

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Could the future for energy soon become a reality?

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Micro Finance

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Command Economy versus Free Market Economy Which is the answer for Economic Development?

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The Digital Revolution Evolution or Piracy?

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South Africa’s World Cup Dream

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Is Russia a 21st Century Superpower?

The Newbies Developing countries around the globe have shown glimpses of their might in the last few decades. So what kept them so long? The cause is a lot greater than one may think, page 14.

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There are many ways to help Have we finally found the solution to poverty? The Ricardian investigates a new way to help that uses both the ideas of Economics and Charity, Micro finance, page 26.

Page 18 How an economist decided the outcome of a penalty shoot-out

Book Reviews

Latest Interest Rate news The Monetary Policy Committee met last Thursday to decide the base rate, page 6.

Still super?

Has the former Soviet Union got what it takes to be considered a modern-day Superpower? Find out on page 32.

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The Bottom Billion Paul Collier

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Outliers Malcolm Gladwell

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Globalization and its Discontents Joseph Stiglitz

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Predictably Irrational Dan Ariely

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Wikinomics Don Tapscott

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The Unconventional Wisdom of Economics Steven Landsburg Anthony Williams

“Why do we support our nation and put our faith, hopes and dreams in the hands of others just for them to be shattered weeks later?�

How the World Cup can re-ignite the heart of South Africa, page 31.

Book Review We give our verdict on the highly acclaimed book by Paul Collier, page 34.

Contact The Ricardian Magazine can be contacted through Paul Bridges at Tiffin School pbridges@tiffin.kingston.sch.uk

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By Maximillian Melsa

Since the Euro came into effect in 1999, it has seen its highs and lows, quite literally. Standing at about just above equal to sterling in early 2009, and currently £1:1.19euro (as of mid July 2010), the sharp fall from highs such as 1.7euro in 2000 has lead to even occasional holidaymakers having to amend their budgets for excursions to the Eurozone. It has brought Britain‘s beloved sterling into question, and raised yet again the issue of how committed and how integrated to the EU are we?

Many citizens see Britain‘s integration with Brussels as inevitable, which would mean the introduction of the Euro to our shores. This would mean a loss of our independent central bank, and a total loss of control over monetary policy. This would currently mean our interest rate would be at 1%, 0.75% higher than what the Monetary Policy Committee think is in our best interest. Also and most importantly, it would mean being part of the Eurozone, which would mean along with the undoubted benefits, we would have to contribute in helping any other nation out of trouble, dare I say, Greece...

The Greek crisis certainly seemed to show that at Maastricht in 1992, Britain made the right decision to opt out of the Eurozone. However the initiative has seen great successes for countries such as Germany and France, whose economies have seen a steady rise since the Euro was introduced. It can be argued that, because of the Eurozone being our closest and largest trading partners, we would have actually benefitted, as trade barriers would have been further removed – after all, a single currency in theory should make it easier and safer to trade.

January 2009 was not the recovery we thought it was going to be

The future of Britain‘s status within the EU, as well as the future of the EU itself, is one that is being kept under wraps, but admittedly it is highly unlikely that we will see a United States of Europe in the next few years. Nevertheless, seeing as the Eurozone is already such a large organisation, which is very attractive to smaller economies such as Serbia, who as recently as December 2009 applied for membership, it will continue to grow. What it needs to thrive is set of laws made to control fiscal policy along with the current monetary powers. However this seems highly unlikely due to certain nations, including Spain, having a far too high sovereign debt to be able to implement the very general stance of the EU.

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By Edward Oh At the start of July, the Monetary Policy Committee (MPC) of the Bank of England decided to retain the all time low interest rate of 0.5%. They have also decided to halt the use of injection into the economy by Quantitative Easing (QE).

This was not a huge shock to the markets or to the public; however there are fears that inflation could be an issue at this continued low interest rate with Andrew Sentence, a MPC member voting to raise the interest rate to 0.75%, stating that this was a necessary procedure to bring down the inflation rate. These concerns have risen as The Consumer Price Index (CPI) was 3.7% in April and a slightly lower in May of 3.4%; still well over the government target of 2%.

Even though there is a risk of inflation the decision of the majority of the MPC members stay firm to hold the interest rate at the 0.5% reflects the findings of The National Institute of Economic and Social Research (NIESR), that estimated the recovery of the economy is deteriorating. Also due to the strict fiscal policy set by the new government, the likely effect of this is unemployment lowering the demand for higher wages, making the inflation, that will certainly come with the low rate, more bearable.

By Alex Pollard China is one of the economies that had little difficulty surviving the recent global economic crisis, proving their position as one of the economic superpowers.

They have been on the horizon for a while now, however are yet to become the leading superpower by overtaking the USA in real GDP. Yet the nation is in a period of change, which along with areas of progress, is also causing problems for China, as well as

companies in the country. Some trans-national corporations are being pushed away from trading with the country due to fear of low quality products.

China's GDP grew at an average 10.1% from 2003 to 2005 - the fastest rate the world has ever seen. It is estimated that the country is to be the largest economy by 2040. This would mean their GDP increase year on year would only have to continue at a mere 3%, someBelow: China may be lagging behind the USA for the moment, but thing that looks almost certain at the moment. they are certainly catching up

There are many reasons why this growth will probably continue at this rapid rate, mainly down to its artificially low exchange rates, an affect caused by not converting currency from export purchases.

Furthermore, the growth will continue as the Chinese government is still dictating to its market, and for that reason, the majority of middle and lower class earners do not have many opportunities to increase wages with inflation.

The only threat to this expansion is something severe happening in China - an implosion. Some workers have now tried to take a stand against their poor wages and low standard of living, shown by workers in Guangdong‘s Toyota plant going on strike at the end of June. Discussions with the workers are ongoing and

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they have now started working again for the equivalent of an extra pound a day, something which can only be described as a short term solution by the factory owners in China. Luckily for the companies, the issue was quickly dealt with, and therefore an outbreak of strikes is unlikely, however the few workers now experiencing higher standards of living will definitely spur on the rest of the workforce, thus more strikes are likely in the near future.

The problem with China is that a lot of wealth is in the hands of the middle classes, so they have no reason to strike, and the lower classes will not cause too much disruption, for fear of job losses. In the next few years, we will most certainly see continued rapid growth, nonetheless at some point in the future it is quite possible that the workers themselves will unionise, and this will immediately stunt the quick growth China‘s government want to see.

By Alex Pollard

The consulting firm McKinsey, showed that since 2000 Africa on average has had annual growth of around 5% until 2008, which is better than Latin America, Central and Eastern Europe. During the Global economic setbacks, which pushed many MEDC‘s into recession, sub-Saharan Africa, the poorest part of Africa, still managed to show positive growth of around 2%.

On top of this the eight strongest African nations (the African Lions, made up of Algeria, Botswana, Egypt, Libya, Mauritius, Morocco, South Africa and Tunisia and a term coined by the Boston Consulting Group) are

growing in economic power, with an average GDP per capita of $10,000 actually exceeding the combined figure of the BRIC nations—Brazil, Russia, India, and China— by $2,000.

Some say that this growth is to do with the increase in the price of commodities, such as petroleum and other raw materials, however we must not forget about the hard work charities are doing to help small businesses survive and grow, and also the infrastructure that has been built for Africa in exchange for the raw materials, a deal which China has so famously benefitted from in the majority.

By Alex Pollard

Many fresh food products seen in Britain‘s supermarkets today are labelled as produce from the West Bank. This produce is actually grown in the Occupied Territories by Israeli settlers and recent Government advice to supermarkets is that the produce should be labelled as ―from Occupied Territories of the West Bank.‖A far greater threat to the livelihoods of the farmers and wholesalers though is now coming directly from West Bank Palestinians who are now boycotting all such products. The produce is mainly made up of fruits and vegetables, such as chillies, oranges, pomegranates, grapefruit or fresh herbs.

produce created by the Israeli farmers and factories.

The West Bank market is worth around $200m (£133m) a year to Israeli businesses. Some factories are more reliant on the Palestinian market selling approximately 30% of the output there, meaning boycott is having a significant impact.

Seventeen factories in Mishor Adumim, a large indusIsraeli factories based in settlements on the West Bank trial estate between East Jerusalem and Jericho, have in Palestine have been forced to cut back production as reportedly closed since the boycott campaign began.

Some settlement factories are reported to be considerthe Palestinian boycott begins to stifle demand for ing moving back into Israel.

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By Maximillian Melsa Because of many of the countries being incredibly The future for the country however is uncertain, besmall in area, population, and in their economies them- cause of the relatively nearby booming economics of selves, countries in Oceania have reacted differently in India and China, who are competing for the same busithe recent world economic downfall. ness as Australia, who are beating them on price. At Australia was seen as a shining example of how to the ―Australia 2020‖ conference, set up by the national avoid a recession, as it did not record a loss in GDP in government in 2008, increasing human capital and the downturn, even though it has a population of 21 more spending in public infrastructure were made key million. This was mostly due to carefully planned priorities in economic policy. These had to be stimulus packages that helped the lower level earners amended to stave off a negative quarter – and this can in the country, very much like what the UK govern- only have a long term negative effect of the whole of ment attempted in the last two years, but not by any Australia. How can a country with the level of tax inmeans did it succeed as much as down under. The country also tightened their borders even more tightly come decreasing year on year continue to give out to prevent more benefit payments being needed for stimulus? As a consequence, it will be no surprise to new arrivals, a very unlikely and tricky move for West- see the country‘s already large trade deficit widen due minster to implicate. to less exports.

By Edward Oh The International Monetary Fund (IMF) said that Japan needs to better their fiscal policy and increase their consumption tax to 15% over a period of year, to ensure a sustainable economy and encouraged Japan to start, by raising the tax to 5%.

tax until the next general election in 2013.

Whilst there are fears of another period of deflation, The Central Bank of Japan has predicted a better recovery than previously thought, with real economic growth estimated at 2.6% in 2011, rather than the prePrime Minister of Japan, Naoto Kan, who was ap- vious prediction of 1.8%. Also the Central Bank has pointed 5 weeks ago, raised the issue by having an ur- kept their interest rate at the low 0.1% to encourage gent debate on whether to raise the tax by 5%. How- spending in the economy. ever unsurprisingly this did not go down very well with the voters resulting in a loss in the upper house Those who oppose of the increase in consumption tax elections. have raised an issue that once the tax goes up, consumers will not be spending in the economy, due to high Since then the Prime Minister has apologized, further prices. This move may put the economy into the trap of promising that there will not be rise in the consumption another recession.

By Maximillian Melsa First was Greece...but who will be next to fall in the with how long the other nations in the Eurozone took now what seems to be damned Eurozone economy? to configure a solution for Greece, as exacerbating the crisis they now find themselves in.

It is Spain that seems to be taking up the mantle. Unemployment is at a staggering 20% in April 2010, Even Britain, being outside of the Eurozone, needs to which is severely hurting the countries chance of trying be monitoring the Iberian situation. Britain needs the to cut what is now the third largest budget deficit in the Eurozone to survive and thrive, seeing as it has beEU – now standing at 11.2% of GDP. Along with come the nation‘s largest trading partner, with the most credit ratings being cut, Spanish President Jose Luis exports as well as imports coming from the incorpoRodriguez Zapatero is blaming the Greek crisis, along rated countries.

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An insight from behavioural economics

By Bhavin Patel

―A

state of shocked disbelief‖.

This was the reaction of Alan Greenspan, the former long standing Chairman of the Federal Reserve, to the burst of the American housing bubble in 2008. Standard economic thinking has deluded us into the perception that nobody could have preempted the subprime mortgage crisis, whether it was the unassuming borrowers or the grossly overpaid financial institutions. However, once the systematic irrationality of everyday consumers and producers is taken into account, coupled with an element of reality, it is evident that there should have been no shock after all.

At the most rudimentary level, as behavioural economist Dan Ariely points out; the majority of consumers struggled to calculate the optimal amount to borrow when purchasing a new property. Consequently, people procrastinated, and as result of this uncertainty, they borrowed excessively in the short term by obtaining a larger mortgage as a proportion of the property‘s value, they sacrificed long term financial stability by incurred higher debt in the future. Such myopic behaviour was exploited by lending institutions, which exacerbated the situation with interestonly mortgages; these, according

On a cliff edge. Banks collapsed because of risky lending.

to rational economics, were purely beneficial due to the short term flexibility they offered (as money was freed up to pay for other debt).

However, as behavioural economics shows this led to borrowers facing higher long term debts, consisting of interest and capital, which they were unable to repay due to an inherent deficiency in financial planning. Was it really expected of borrowers, with no expertise, to be able to make such complex calculations for the future?

Borrowers also fell victim to the dangers of ownership. Irrationality explains how once we own something, (or rather merely feel like we own it in the case of houses) subjectivity causes us to over-value it.

In the housing market this resulted in the money illusion, where homeowners overestimated the real value of increases in the price of their house. This perpetuated over long

periods and led to excessive consumption, courtesy of the wealth effect and an unsustainable negative savings rate in the US. Would it genuinely have been possible to sustain this speculative housing market based on such abstract foundations?

Now one must confront the role of the greed and fear driven markets.

Rewinding a few years ago to before the boom, it appeared that financial markets were insufficiently profitable. The general consensus that market returns were low led to a widespread search for greater yields above those of average market rates for low risk assets. Such a propensity to take excessive risks in order to avoid incurring losses as appose to gaining an equal amount is known as loss aversion.

Unfortunately the rapid perpetuation of such behaviour amongst markets led to many of the risks

11 not paying off. Why were we fooled into expecting that causing the 2008 crisis. The interconnection of finanthese ever growing risks would be successful over a cial markets, intended to enhance innovation and trade, sustainable period? in fact increased irrationality by creating a situation of mass uniformity, courtesy of the ease with which inforAll humans, honest or not, have a certain propensity to mation spreads, which in turn reduced innovation and cheat if given the opportunity. If the rewards of cheat- competition. Consequently, a global lack of diversity ing outweigh the costs, namely, getting caught, then appeared, leading to an insufficient spread of risks in any economic agent would cheat. Therefore, it is un- markets and an increased likelihood of a crash which surprising how when bankers and financial institutions then reverberated throughout the world due to globalwere paid astronomical sums to see reality in a certain isation: cause and perpetuation. Was it truly believed way, they saw it in exactly that way. For example, that total integration would not have a single downfall? credit rating agencies face an inherent conflict of interest which they can exploit to their benefit; many have The aforementioned concepts and illustration of sysaccused them of issuing financial instruments with in- tematic irrational behaviour merely begin explaining accurately stellar ratings, given how the very banks the predictability of the 2008 subprime mortgage crisis whose instruments they are rating are in fact paying from the perspective of behavioural economics. The fees to the agencies. Furthermore, the development of many borrowers who typically procrastinated in their increasingly complex investment ‗vehicles‘, such as financial planning were unable to sustain mortgages on Credit Debt Obligations squared, represented greater houses which they disastrously over-valued due to the ‗steps removed from money‘ over time, a factor. due to nature of ownership. Such borrowers, enticed into subcheating norms. Which meant that institutions and in- prime mortgages, were then exploited by lenders and dividuals were more likely to cheat due to the lack of a investment banks, both of which, due to the temptation moral benchmark. Thus, should we really be shocked to ‗cheat‘ and due to loss aversion, took excessive risks by the ‗greedy bankers‘ for the way they acted and with increasingly complex financial instruments and contributed to the crisis? derivatives. Finally, globalization exacerbated the situation and led to a more rapid, harder and wideGlobalisation: widely heralded for the successful inte- spread crash in credit markets. Simple? gration of economies, yet played a significant role in Here, there and Everywhere: Loans were even being given out to people with poor credit ratings

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About: When it comes to economics and discussing market behavior, Gary Van Vuuren is undoubtedly a passionate individual. His understanding of international economics and finance is highly impressive and he is able to convey complicated concepts in a simple yet fascinating manor. He is currently the Senior Director at Fitch Ratings, London and he has a well established background in the city of London, working for companies including Goldman Sachs, Ernst and Young and Merrill Lynch. He is also an esteemed academic, a prestigious writer, professor and part time lecturer in the UK. Gary in front of Mount Everest

Greed and fear drives the market Dr. Van Vuuren discusses the Financial Crisis, the role of Maths in Economics and the importance of Behavioural Economics Ric: In your opinion, do you believe that investment banks should take similar if not more blame for the crisis?

GVV: I think the answer is yes and no. Investment banks only exist to make money. Young, foolhardy investors that work for these banks take big risks, where there is a higher possibility of default, but equally the chance of a much higher return. Banks allocated the different risks and created Collateralized Debt

Was the correlation zero? What is it now?

Obligations (CDOs). There were also Asset managers that invest on behalf of pension funds. They bought up the ‗safe‘ low risk tranches, which were likely to make small but steady interest payments. This capital structure functioned under the impression that the tranches had a correlation of zero, like a minefield. We assumed that if a higher risk tranche defaulted, it had no effect on the next tranche. This analogy worked when the markets were good, but when markets were bad, it was as though we were walking along a cliff edge, with all the tranches roped together, and when one tranche fell, they all fell. This is exactly what happened and the correlation pushed up to one. This meant that even the AAA tranches, that were held by pension funds, defaulted. These were rating entities that were only meant to default every ten thousand years. That is where we, the rating agencies, got it

wrong. So it was partly the banks‘ fault for taking so many risks, but also the rating agencies‘ fault for assuming the correlation was zero. But saying that, the models were good for so long and the correlation always hovered around zero and only spiked when the markets were bad. It is like someone suddenly telling you water is not good for you, after you hearing how good it is for so long.

Ric: CEO Raymond McDaniel of Moody‘s says the ratings should have been used as a guide for investors as appose to what they were seen as by investors, a stellar ―buy, sell or hold recommendation.‖ Does this suggest that rating agencies should not be blamed?

GVV: We, and all other rating agencies say that our ratings are not to be used to instruct whether to buy, sell or hold. So what should they be used for then if not

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an indicator? I think its a big problem with the rating system itself. If it is not useful to investors, what is the point of it?

flows because if you did not, the other Credit Rating Agencies (CRAs), Moody‘s and S&P, would have. How do you assess this view?

Ric: Therefore, is it the government‘s fault? The SEC in the US, Bank of England, and the European Central Bank have over the years come to explicitly endorse the 3 rating agencies, putting the global economy at their mercy.

GVV: Exactly, remember you do not have to go to all three rating agencies.

If we refused to rate any given tranche because it was too risky, the other CRAs would have and we would have lost millions of pounds. For example, there were Constant Proportion Debt Obligations that were so complicated and confusing, we refused to rate them. This was only a small part of the market though. We were still involved in rating CDOs and CDSs because they brought in a lot of money. If we stopped rating these cash flows for a month because they were too risky, we would not have lost that much money.

But if we stopped rating them for months or years, we would have been overpowered by our competitors.

GVV: That is absolutely true, it is a monopoly. All rating agencies say that a rating is not an indication of absolute probability of default, but only relative. On the rating agencies‘ websites it says that a rating is an ‗opinion.‘ It‘s not a fact. Therefore rating agencies cannot be sued, and by doing this, it avoids a lot of litigation.

Ric: Why did Credit Rating Agencies skip corners by not demanding verification of crucial mortgage data, or refusing to rate securities where data was not present?

GVV: That is right, we could have demanded the data, but the answer is obvious; money. Some rating agencies were bringing in 80 per cent of their revenue over that 2004-07 boom.

There were enormous volumes of securities that needed to be rated. Cash flows such as mortgages, CDOs and all other fixed repayments needed to be securitized and allocated into tranches. We did not have the time to demand anything, there was so much money to be made that we assumed that everything was okay; of course, that is where we failed. But as soon as the cash flow stopped, the model stopped working.

GVV: Legislation in the US has been introduced so banks have to have ‗skin in the game,‘ meaning they have to invest a certain amount of their own money into securities and I‘m sure this type of law will be introduced around the world. The regulators have realised that everything in the markets is selfmotivated and self-serving and it is very clever. Bonuses have also been reformed so that bankers are given shares in the company rather than money. I think this will work in the long run, because it does not stifle innovation, but it also controls banks and companies.

Ric: How significant is mathematics when dealing with financial situations and Economics?

GVV: The mathematics of finance is not complex. Linear algebra, the normal distribution are at the centre of our statistical models used in finance. We often use the concepts of scaling and volatility There was a similar situation with and vector analysis, all of which are not banks. ‘Risk averse‘ banks that were too difficult. holding back and acting safely were making returns of 7 per cent, but other Ric: What was the one event that finally banks were making returns of 30-40 caused the financial system to collapse per cent. Shareholders in such risk after a period of years on the edge?

averse banks would have punished GVV: It was the fall of Lehman Broththeir methods. ers. It was too big to fail, the connecRic: When you downgraded Greek tivity it has with the rest of the market Sovereign Debt to ‗junk‘ status, did made everybody think it could never fail, and of course it did. The US govyou consider market reaction? ernment could have bailed them out but GVV: Absolutely, but what do we do? they did not. They had a moral dilemma.

Our job is to state fairly the risk of They wanted to send a message to other investing in a security, a sovereign etc. banks by not bailing Lehman‘s out, it A one notch downgrade would spread was the right thing to do, but at the havoc across the Eurozone because wrong time. If they did bail them out, markets are driven by greed and fear. other banks would perhaps become less worried because they knew they would Ric: Where is the delicate balance be bailed out. But once Lehman‘s fell, between making sure a crisis such as the markets filled with fear which that Ric: One could argue that you had no this does not occur again while not led to the lack of lending between the choice but to securitize these cash hampering innovation? banks.

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By Abdur-Razzaq Ahmed The century of emerging markets for participation. The survival of the global economic and political system depends on the inclusion of the poor and marginalized. We are united globally and the system cannot function with huge pockets of exclusion.

Is the balance of global power about to change?

Over the last 150 years, capitalism has become a dominant force in economics and politics. While the West has supposedly flourished under capitalism, developing countries have arguably been damaged by its weapons. At the 2005 TED conference in Oxford, Afghan economist Ashraf Ghani identified this issue and suggested that to fix these broken economies, ―the idea of capitalism itself would have to be transformed.‖ The majority of the world‘s population is excluded from the positive benefits of capitalism and from democratic systems. Resources such as Timber, diamonds and emeralds are just a few of the commodities that have been extorted from poorer countries by capitalists. As a result, these countries have fallen into repressive and economically-inactive states. Throughout the 20th century,

Western companies ‗invaded‘ lessdeveloped counties and claimed the exclusive rights to goods. For example, the patent for Basmati rice are held by a Texan company and the patent for Turmeric (which has healing properties) is held by 2 doctors from Mississippi. According to Ghani, this is an example of ‗intellectual property‘ theft that has directly caused some economies to shrink, rather than expand.

In the 19th century, the question in the West was how to advance the working class to the middle class.

However, the most important issue now, is to include the world‘s poorer citizens by providing opportunities

So how do we fix broken states?

The theory is relatively simple; you mobilize capital. Financial capital (i.e. money) cannot boost an economy alone; other types of capital such as physical, human, security and information are needed. This combination of capital will enable countries to achieve the functions synonymous with a developed state.

Such an example is managing public finance, which can be achieved in three ways: (1) efficient allocation of resources, (2) distribution of income via taxation and redistribution and (3) macroeconomic stabilization using monetary and fiscal instruments.

There is also a need for investment in these developing countries, specifically in human capital. 47 per cent of the population is below the age of 15 in Nigeria and this is a common statistic throughout Africa and other developing countries. In order for these countries to progress and benefit from capitalism and globalisation, the population must be educated and skilled, specifically the younger generation. Therefore, should the West share their knowledge and resources to assist other countries surface into the 21st century? Some countries began to show their awareness of the market in the previous century, most notably China, South Africa and Russia.

15 Shooting up from the undergrowth Some developing countries have recently created firms that are market leaders

In just a few decades these countries have become the ‘emerging online giants.‘ Tencent, a Chinese firm, has made some promising investments in other emerging markets. Now, even Western internet financiers are trying to emulate them. DST, a Russian firm created in 2005, is already dealing with fast-growing Western firms, most notably Facebook, the world‘s largest social-networking site. This is definitive proof that many emerging markets do have the potential to reap the benefits of Capitalism and Globalization.

drug economy but that it has the ability to become a competitive textile manufacturer, if given a zero percent tariff. He brilliantly states how ―cotton does not compete with Opium. A T-shirt does,‖ stressing the potential of Afghanistan. Perhaps a partnership with a Western fashion firm may boost Afghanistan‘s economy. It would provide capital, investment and most importantly employment.

The West thought it had come up with a solution to this issue, by creating billion-dollar aid schemes. But like many other prominent figures, Ghani has criticised A Global Responsibility Ghani claims that countries cannot stabilize on their them in favour of private investment, critically stating own, citing his own country as an example. He accuses that: ―a dollar of private investment is equal to at least the ‗problem solvers‘ in the West of shying away from 20 dollars of aid, in terms of the dynamic it generates.‖ their global responsibility to battle corruption, and until Western economies become less selfish with their in- The problems facing under-developed countries are formation and ideas, the problem of ‗broken states‘ therefore much more serious than first thought. Their will continue perpetually. progress is not only determined by themselves, but all other participants in the global economy. Perhaps the Perhaps the answer is to mobilize trade; according to greatest responsibility does indeed lie with the innovaAdam Smith, trade is essential for economic develop- tive and technologically advanced Western economies. ment as stated in The Wealth of Nations: ―an essential cause of economic growth, is growth of trade.‖ Smith As one of these advanced economies, should we not then states that only trade has the potential to help countries tackle difficulties such as corruption so ―strengthen the bands of interdependence in society.‖ they can develop? Because if we do not, who will?

Ghani describes his home country, Afghanistan, as a

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By Akash Bhanot

If you ask investors what risk they assume when buying stocks, they likely will respond, ―Losing money.‖ Others do not define risk as a likelihood of loss, but as volatility. In a rising market high volatility can boost the return potential of an investment. Volatility is essentially a double-edged sword, and does not measure what an investor intuitively perceives as risk.

If you were to craft the perfect investment, you would probably want its attributes to include high returns coupled with low risk. The reality is that this kind of investment is next to impossible to find. Not surprisingly, people spend a lot of time developing methods and strategies that come close to the "perfect investment". But none is as popular or as compelling as modern portfolio theory (MPT). According to modern portfolio theorists, risk is measured using methods such as standard deviation and beta. Standard deviation is a measure of absolute volatility that shows how much an investment‘s return varies from its average return over time. Beta is a measure of relative volatility that indicates the price variance of an investment compared to the market as a whole. The higher the standard deviation or beta, the higher the risk. An entire industry has now been built on measuring financial risk in terms of volatility. For the most part the introduction of these measures has been extremely healthy for the financial services industry. Because it has forced fund managers to remain mindful of risk issues, amid the never-ending competition to generate good returns. But what happens when the statistics don‘t show the full picture?

In August 2007, the world witnessed one of the worst global financial crises in human history. The cause of the meltdown is still one of the most heavily debated topics. However, it is clear that one of the main components of the disaster was the ‗reckless‘ risk-taking by both banks and other individuals. Almost every bank gave out risky loans (although some more than others) – known as sub-prime loans – to maximise their

incomes. This in itself is nothing new, banks have been doing this for years. However the problem arose when banks went into overdrive, handing out ludicrous loans to people who had no chance of paying them back.

Also, the magnitude of the risk was mis-judged, fatally so. Banks failed to see the correlation between defaulting in one pool of loans to another pool. In other words, if one of your neighbours defaulted on their loan, the bank believed that the probability of you defaulting was 0. This may be true under quite flourishing economics circumstances, but during an economic downturn, the probability came very close to 1.

In essence, the banks, hedge funds and others had become over-confident as they all thought they had figured out how to take on risk and make money more effectively. As they initially made more money taking more risks, they reinforced their own view that they had it figured out. They discovered their risks had not been spread effectively.

You may now be questioning the real positive impact of risk on an economy. As outlined previously, risk can be extremely detrimental in financial markets but it is still what global markets operate on. If people did not exercise risk there would be no incentive to improve, innovate or increase turnover. Let us now examine a profession which relies on taking healthy risks – an entrepreneur. Risk underpins entrepreneurship. The risk of walking away from security and a career path to create something new. The risk of taking yourself and your family into an unfamiliar storm of stress and uncertainty. Such is a man by the name of Neville Upton, CEO and founder of The Listening Company. By having the chance to listen to him talk about his managing of a multi-million pound company, a number of compelling arguments were made.

Neville believes that even though he had to take some hefty risks in ensuring the success of his business, many entrepreneurs who he has met cannot say the same. He comments on the new wave of entrepreneurs who are seemingly more risk averse. Understandably, the effects of the credit crisis may have meant that entrepreneurs are less willing to take risks and that many

17 entrepreneurs may seek a different and more economi- The bananas. Then the scientists replaced one monkey cally stable job. Neville displayed his thoughts through at a time. Each time, the new monkey was warned by the use of the diagram shown below. the other monkey and did not get the bananas. Then, a new pair of monkeys were put in each time. Amazingly, even after having no warning, they still did not attempt to climb the stairs. Then came the rogue monkey. He went straight up the stairs and got his reward.

Interestingly the water and shocks were even turned off, so even without any risks the previous monkeys did not even attempt to climb the stairs. The analogy He explained that many entrepreneurs are operating shows that if no-one took risks or dared to venture out within the confines of the triangle when in fact; they of the norm, there would be no rewards to reap. It is should be within the circle. Only through taking risks therefore evident that risk is hugely influential in ecocan one expect a higher return. So why don‘t these nomics and global financial markets operate on the people take more risks? Neville‘s opinion as to why idea of risk. If risk was not exercised, there would be people are so risk-averse is due to underlying behav- no incentive or major reward. However, if used in the ioural patterns within society. By using the analogy of wrong way, risk can have an adverse effect as well. As the rogue monkey, his argument became all the more the CEO of the Listening Company explained, the suctrue. The analogy stems from a scientific experiment. cess to business management, in ensuring that the deliTwo monkeys are kept in a room with a bunch of ba- cate balance between risk aversion and innovation is nanas at the top of some steps. However in order to achieved, is to employ some 'rogue monkeys‘ which reach the bananas, the monkeys would have to endure are not subject to the inbred behavioural patterns of a a cold shower and a mild electric shock. The first two society, and therefore take risks that deliver optimum monkeys were put off by the shower and failed to get returns.

Neville Upton’s ‘success graph’ gives a visual example of entrepreneurship.

18

By Samad Hasan

Penalties, some people say its luck. While one team is

Palacios-Huerta collected a database of 1,417 penalties taken between 1995 and 2000. Palacios calculated the ‗optimal mixed strategy‘. This was that 61.5% of penalties should be shot to the natural side, whilst 38.5% should be shot to the unnatural side. This was a fair point as more of the penalties are being shot to the stronger side of the kicker. This strategy was also calculated for keepers. This was that keepers should dive to the natural side 58% of the time and 32% to the unGame theory Game theory is a form of applied mathematics which is natural. commonly used in economics. The theory attempts to capture behaviour in strategic situations where a per- As a result of extensive research from professionals, son‘s success depends on another person‘s failure. teams are much more equipped in dealing with penalty Also a person‘s choice depends on another person‘s shoot outs. This for me has made the game much more choice. The perfect application of the game theory is interesting to watch as teams go in with a strategy inthe penalty shoot-out where the keeper‘s success is the stead of just blasting the ball anywhere. However kicker‘s failure. This is an important link to make be- teams can go further into their research and study the cause it shows that planning and strategy can be based actual psychology behind penalty shoot-outs. on science and mathematics, rather than an instinctive approach. jubilant after winning, the other is devastated by failure. Some players are exceptionally gifted at penalty taking which cannot be purely down to luck. A lecture

by Stefan Szymanski gives a scientific approach on the Champions League final in 2008 between Chelsea and Manchester United.

Left or right? Van der Sar guessed right, but one economist knew before the ball had been kicked...

19 Shoot-out: Manchester United v. Chelsea An economist named Ignacio Palacios-Huerta researched deeply into Manchester United‘s penalty strategies and provided a report to Avram Grant (manager of Chelsea at the time).

1.

E.g. the kicker and the keeper must each choose a strategy, but each person‘s strategy depends on what he thinks the other person will do. This link with the game theory showed me just how difficult penalties are psychologically.

Van der Sar mostly dived to the kicker‘s ‗natural On to the shoot-out itself, this was my favourite part of side‘. For a right footed taker this would be the the lecture. The first four Chelsea penalties all went to keeper‘s right side.

Van der Sar‘s left. Cristiano Ronaldo then stupidly stops in his run up; this gives Petr Cech ample time to 2.

Most of the penalties that Van der Sar stops are figure out where he is going to shoot. Ashley Cole was at 1-1.5 metres high. the only one so far to forget the advice and shoot to his natural side. Luckily for him he did follow the advice 3.

Cristiano Ronaldo had a preference to shoot at to some extent which was to keep the ball low. The his natural side. game was within Chelsea‘s grasp. He did however 4.

If you win the toss you should always go first. send Van der Sar the wrong way.

60% of teams who go first win the shoot-out.

When Anelka stepped up for the crucial spot kick an These facts turned out to be very interesting when ‗incident‘ occurred. Van der Sar pointed to his left and watching the actual shout-out. Szymanski then linked said to Anelka ‗that‘s where you‘re going to put it.‘ the game theory very effectively with the penalties; Sadly for Anelka, Van der Sar chose correctly and however he could have gone further with his analysis saved the shot which to his ‗natural side‘. Mr by adding looking at penalties from a more psychologi- Szymanski said that the main reason why Anelka went cal angle. This is because players often say that the to the right is because Van der Sar had ‗hinted‘ him to. reason why they do day badly is mainly down to However 72% of Anelka‘s penalties went to his natural nerves. side and most of them were successfully converted.

In conclusion, Mr Szymanski had made some good The game theory in penalty terms is simply ‗what I points such as penalty takers should approach a mixed should do depends on what you do and what you strategy in which the goalkeepers cannot study a patshould do depends on what I do.‘ The game theory de- tern. This effectively means that to predict which way pends on the analysis of how an individual. the ball is going to be kicked is virtually impossible.

20

By Zachary Pajak To buy or not to buy; that is the question

―Buy

your groceries from Ocado but don‘t buy shares‖ was the advice given by Dominic Bailey, Business Editor of ―The Sunday Times‖ in a recent lecture on the imminent floatation of the grocery-delivery business.

Ocado, a multi-award winning company formed by three ex-Goldman Sachs directors in early 2000, offers a ―best-in-class‖ service delivering Waitrose products to the homes of one million shoppers. This month the company is planning to list on the London Stock Exchange with shares trading at about 200p to 275p. As well as selling shares to big City institutions the company is offering loyal shoppers (those who have spent more than £300 since the start of this year) the chance to buy some.

Ocado‘s 23 acre distribution centre is located about 20 miles north of central London, in the town of Hatfield, Hertfordshire. The facility is only half full meaning they can double its capacity there. It is built to handle orders placed over the Internet for home delivery to customers in the London metropolitan area. Ocado owns nearly all of the clever technology it uses in this warehouse which is considered highly valuable to global retail suppliers and Ocado would consider partnership deals which would create further revenue.

Since the company was created 10 years ago from a ₤46 million investment and 40% ownership stake by Waitrose, it has attracted around £350m of investment from the likes of Al Gore and Procter & Gamble.

Ocado took a deliberate and carefully planned approach to developing a business, now thought to be worth up to £1.37bn, and the company now feels it‘s The share issue aims to raise £200m which the comtime to compete with the big dogs. pany will use to take development to the next stage, expanding its main Hatfield warehouse so it can handle But could the shares be hitting the shelves a little too more orders and expanding in the North of England soon? Some retail analysts thinks so given that the with new warehouses. Ocado also aims to open other company has not made a pre-tax profit since it made its smaller sites around the country so it can deliver furfirst delivery in 2002. Philip Dorgan at Ambrian, for ther afield, though further funds would need to be example, says "the economics don't stack up", he reck- raised to do this. ons Ocado is likely to be worth £500m rather than £1bn.

Though online shopping is becoming more and more popular, it won‘t be straightforward for Ocado to mainHowever there are good reasons for this lack of profit – tain its growth in sales. Ocado currently takes 14% of Ocado has been investing heavily in its warehouse and the grocery online market – but only a few weeks belogistics, building up perhaps the most state-of-the-art fore the float Amazon.co.uk launched its own online delivery operation in the business where up to 100,000 grocery store, offering free delivery on 22,000 grocery orders a week are "picked" and packed by a mixture of products (topping the 20,000 goods offered by Ocado). robotic technology and staff. The system is far more Waitrose itself has thrown a spanner in the works by efficient than the online delivery process used by removing the non-compete agreement for its own deTesco and Sainsbury's which just tend to have a bloke livery arm, WaitroseDeliver. However, despite going round the store after closing time filling a Ocado‘s sometimes fractious relationship with trolley.

Waitrose, the two groups have recently signed a 10-

21 year agreement for Ocado to sell Waitrose groceries, and says Ocado's warehouse model offers huge advanwhich is a major bonus for Ocado. tages over Tesco's delivery service and says the business offers "strong potential". Ocado‘s directors say Jason Gissing, one of the three founders, believes their new investors must consider the ―huge potential‖ of the loss-making firm with a £300m turnover has the poten- business rather than its track record. tial to become a £3bn internet retailer. Growth venues include own-brand goods or selling non-food items, So, in conclusion, maybe Dominic O Connell was a and sales are growing at 30 per cent a year. Some ex- little too hasty to reject Ocado‘s shares just yet. It‘s pert analysts believe it‘s possible for the company to true that Ocado is not a dead-cert success in an uncerhit profits in just 2 years time! The broker Ambrian tain stock market and for those without an appetite for sees profits of between £15million and £73million by risk, it is probably better to buy the groceries than the 2014 depending on how fast sales grow with the top shares. But if you like a bit of a gamble, and you‘re figure based on very optimistic assumptions. Nick prepared to invest some money for the longer-term, Coulter at Numis Securities also thinks the shares will then there‘s plenty of evidence to suggest that Ocado be a winner. He points to the shift to online shopping might just deliver.

By Hyun Minh

Paj Holden, an everyday economics teacher who has found that his passion and understanding of economics could not be contained in the environment of just a classroom, expressed his love and enthusiasm of the topic by posting his own personal interpretations and breakdowns of economic notion.

His standard videos of economics such as 'monetarist and Keynesian' have excellently explained the very complex idea of unemployment.

What is so memorable and

thoughtful of Holden is that his videos are made arguably for his own desirable pleasure and enjoyment, considering the fact that he does not have any sponsors or any known incentive to produce such useful source of information.

Holden’s trump card: a supply and demand diagram

As a teacher already in the field of economics, the best part of his work is that he makes the videos understandable and digestible to economic virgins. At one point, Holden explains why monetarists does not worry about unemployment as they predict that the original output level will be produced if the market was left to solve the problem, also known as 'laissez faire', he later goes on to explain this might not be the case if there are market failures e.g. strong trade unions or high national minimum wage which prevents the growth of the economy and thus sustains a greater unemployment level.

Paj Holden also could have mentioned the fact that the time needed for people to realize the necessity for wages would be short, the time lag of unemployment would be insignificant and the economy would regain its full real national output considerably fast. However regarding the circumstances of the current economy, with high savings ‗cushioning‘ the consumers hardship of unemployment, Holden did

22 did not mention this. So although reference importance stickiness where the fall in demand does not lead to a was high, it was concise and well thought-out. fall in wage levels thus concluding by saying you could have long run AS without the full unemployment The short but extensive clarification of the way eco- level. But let us consider what he is saying in reality, nomics works is clear and precise in each and every looking at the economy at a lesser magnitude, a popuone of his videos, as he refers to the neo-Keynesian lation of 20 and supermarket as the only work option, theory of unemployment, mentioning that there is a although the system and how it is run may be different, difference in opinion, specifically 'two groups' one be- taking only into perspective the employed, the want-toing the rational expectation group arguing the instanta- be employed and the change in revenue as a result of neous change in wage adaptation whereby he states the employed. Stating the obvious, the more workers that the obviously clearer and more dependable ap- there are, (in the case of a market), however as there is proach to the situation would be the adaptive expecta- an increased number of workers, more of the markets tion, which would take few weeks or months for the goods will be consumed, concluding in inflation. To workers to adapt to the change of wage. This irrational stop this inflation spiralling out of control and becomapproach of purely guessing that the ‗more‘ rational ing hyperinflationary (near impossible) the market reconsequence of fall in wages to consumers is ignorant duces the wages. People as a result stop working and since Holden mentions that there will be restrictions therefore the market withdraws from the original outlike strong trade unions and national minimum wage put level. Now, what does this mean? As Holden failed preventing the market from reducing the number of the to mention, this is a typical economic situation. There unemployed, which consequently contradicts his own is the argument, whereby the government would then argument of unemployment. use taxation to feed the needy but that is purely because of the lack of effort for job placements and the With the argument now moving towards the Keynesian inability to endeavour. view, Holden describes the shape of the curve and how it has been modified with the re-interpretation of the Holden explains in as little detail as possible the two current problems of the market. Holden at this point opinions of unemployment. He states that unemploycould afford to leave out the old LRAS curve of the ment is there but fails to mention how to solve it. He Keynesian view, as this has no relevance to the present states that the two views of monetarists and Keynesian economy, but as further clarification, he decided it are different but does not evaluate to show why and would be best to use the old data, to then explain the how both make sense, but he did explain the outcome new, tailored neo-Keynesian theory. At the pinnacle of of unemployment, the fall in real national output. But his argument, he compares the two arguments, with is that not worth it as it stops inflation, deflation and monetarists believing you are always at the full level of increases competition. So which is it? Is unemployoutput and the Keynesian arguing because of the wage ment good or bad?

23

By Alex Holliss

We are all aware that there is a cost to society when

However, over allocation of permits and many compaenvironmental problems deteriorate, which varies de- nies using them as a source of profit may explain why pending on how much you value the world we live in. they were so readily accepted - it only solves the probEspecially when you know that it is unlikely that our lem at face value. generation will have to deal with issues such as resource depletion and global warming. Although such Eco-industries have grown to become one of Europe‘s problems have not fully reached our homes yet, costs biggest industrial sectors and can be very lucrative. of inaction are already carving into the profits of busi- Countries such as Germany and France have exploited nesses and government spending. Health costs from air that, leaving the UK in their exhaust fumes, and bepollution are estimated to be between €275 billion and coming the two largest producers of environmental €790 billion a year in the EU, including 369,000 pre- technology in the EU. The eco-industry not only leads mature deaths and the loss of 347 million working days to a cleaner environment, but contributes to economic a year. In the UK, air pollution is responsible for more growth and employment. It‘s amazing to believe the UK has been so slow to react; with so many benefits than 6% of deaths. urging our economy to invest this industry. The ecoIn 2004, climate change related disasters caused eco- industry accounts for 1.7% of employment in the EU, nomic losses of more than €86 billion around the which is substantially more than prominent sectors world. The future appears even bleaker, as a German such as car manufacturing and pharmaceuticals. HowInstitute for Economic Research predicts a temperature ever, in the UK only, it accounts to around 0.5% of rise of 4.5°C by 2100 would cause €330 billion annu- paid unemployment. The UK has missed a great opporally in damages. When compared with the price needed tunity to remain up to date and develop its environto fight climate change, 1% of global GDP as pub- mental policy to shift employment towards jobs associlished by the Stern Report, it is clear that the benefits ated with cleaner products and processes. more than outweigh the costs. Nevertheless, the world has yet to make any coherent efforts to solve global Some companies are already innovating to maximise their use of resources leading to greater profitability warming. and an improved brand image, such as British TeleA year later in 2005, the EU took a step in the right com, who reduced their CO2 emissions by 71% bedirection with The Emissions Trading Scheme, cover- tween 1991 and 2004 saving £1.1 billion in four years ing over 11,500 energy intensive installations. Recent through lower bills. While other companies and counstudies conclude that the targets can be achieved at an tries are continuing to pollute regardless of economic annual cost of €2.9 to €3.7 billion, less than 0.1 % of gain taking no responsibility for the catastrophes they the EU‘s Gross Domestic Product. The scheme works are contributing towards. However it is clear by the by allocating carbon dioxide permits which caps the failure of the Kyoto protocol and the Copenhagen conamount of emissions for the year. The mount of per- ference that the biggest obstacle to solving environmits issued to countries will be reduced over time to mental problems is the reluctance of the US and NIC‘s cut green house gases gradually. Pollution permits are (newly industrialised countries) to agree to any signifitradable, which means firms can buy and sell allow- cant reforms or quotas. On the small scale, businesses ances. This leads businesses to seek efficient ways to are taking the initiative to innovate and invest in new control emissions and earn extra profit by selling per- technologies because as the symptoms of global warmmits. The scheme has been such a success that the EU ing increase, being environmentally friendly is just environmental standards have been adopted by non EU good business. countries and become accepted world standards.

24

By Hakim Bahri

Three centuries on from the industrial revolution and our energy consumption is at an all time high and continuing its exponential growth. Our heavy reliance on oil and gas has been far more advantageous to the development of every economical aspect of our everyday lives. However this has come at a price of dependency which became apparent during the first oil crisis in 1973 when the Organisation of Arab Petroleum Exporting Countries (OAPEC) placed an oil embargo in response to the United States re-supplying the Israeli military during the Yom Kippur war. Using the laws of Supply and Demand this triggered a spike in the price of oil due to increasingly low supply, and caused all sorts of costly economical and diplomatic problems. A

few oil crises have occurred since, thus triggering the start of what we now call research into alternative energy sources.

The Japanese were the first huge investors into fuel efficiency and began to shift away from oil intensive industries. In the 21st century research has progressed to an advanced state to which the possibility of dropping our oil reliance could soon become a reality. Earliest forecasts predict as soon as our next generation of children may live to see the day oil runs out. The disastrous consequences of this would affect our fundamental needs in a globally united world: transport, lighting, warmth, etc, and most importantly energy to drive our everyday obligations. In 2007 oil consumption in the UK was at 38% of energy consumption along with natural gas at 37.7%, coal 16.7%, nuclear power 5.8%, and renewable as a measly 1.8%.

Most would argue that in order to secure our future in energy, the time to act would be now. One company in favour of such development is Desertec, a foundation of European companies dedicated to creating vast concentrations of solar power systems and wind parks in the Sahara Desert located in North Africa. If 0.3% of the Sahara desert could be used as a solar panel park, this will create enough energy for Europe for a year.

The potential of such a project could overshadow the billion dollar start up costs and make such investments viable.

Will solar cells every become a dominant energy source?

Hydroelectric power is another alternative which has picked up very fast. They can generate enough energy to power local towns. Micro-hydro systems in the Solomon Islands deliver approximately 50 kW of electricity. Of course this all depends on the availability

25 of running waters in the area, but if used they can fulfil huge potentials. A great example is the Hoover Dam in the United States which helps power the energy consuming town of Las Vegas.

The cheapest but most inconvenient method of generating renewable energy is through the use of wind farms. They take up land; create noise and landscape pollution, as well as only working efficiently at altitude or offshore where the winds are at high velocities.

However they deliver from 600kW to 5MW of power making them attractive prospects to individual businesses.

These are the three fundamental uses of renewable energy in operation around the globe. The logical solution to switching our dependency from oil would be to create mass fields of these alternative energy sources.

It seems the technology is available, but major issues underline our ability to act. The costs are something it seems no country is willing to fork out. Especially in the current financial difficulties, cash for projects are the last thing a government would seek for while cutting budgets. Also mass concentrations of renewable energy would become high priority targets for terrorism. And the inevitable imbalance of payments would occur from the high reliance on imported energy from foreign bodies capable of its production, as well as a change in our diplomatic interests created from giving important leverage to external countries. The concern is that all these problems are human made, and if we are to use our innovation to save us from future catastrophe‘s then we must find a way to uncomplicated matters in the world for the greater good. This is easier said than done, and for that reason I believe a future of renewable energy is a lot further away than people expect. It is not technological problems delaying us, but I question our ability to ever stop our need\ for oil and gas before these resources run out.

What does the future hold for energy? It’s up to us

26

By Abrar Nurani

For thirty years, micro finance (the provision of financial services to low-income clients) has become increasingly associated with poverty eradication and proposals to bring sub Saharan Africa into the global economy. This new form of investing in the poorest rather than giving, has sparked interest from large aid foundations and many governments across the world. Malawi is a perfect case study to represent Africa because of its dependency on agricultural exports and demographic makeup which bare close relation to that of the continent as a whole. By investigating the impact on a specific country it allows for one to extrapolate and Jobless but not talentless: Is micro finance the answer? assess the likely impact on a large imperceptible economic growth?

Malawi's unemployment figures scale. show a drastic imbalance in that By re-establishing and in some 62% of its population are below the Malawi is a country which has been significantly affected by micro fi- cases creating a credit market, mi- age of 24; it is therefore essential nancing in the last decade. The in- cro finance is maintaining a founda- that in the long run jobs can be provestment has enabled many to start tion for new business to emerge. It vided for this large future workup their own businesses by granting constitutes growing confidence force. Also, as micro financing them access to small loans and which in the long run boosts the increases in efficiency and outreach business advice. This country has economy by attracting foreign di- there will be a multiplier effect on been of particular interest due to its rect investment whilst ensuring that standards of living. However, in weak credit structure drawing paral- capital distribution remains fairly Zomba (southern Malawi) it has lel to that of Latin America which equal. This lack in distribution of become apparent that micro financalso experiences slow economic funds is a major concern because it ing has created an informal econgrowth. The country however, is means a significant amount of Ma- omy that comprises 70% of the economically comparable to many lawi's work force participating in city's population of whom are not other countries in Eastern Africa manual labour, which is 80% of the registered to be on formal employwhich have low unemployment fig- total, are deprived of basic stan- ment. Although it provides flexible ures (Tanzania - 4%) and a devel- dards of living. Nonetheless, the employment, an informal economy oped export sector which is primar- advantage of micro finance in com- makes GDP figures for these counily agricultural. This then begs the parison to other aid programmes is tries inaccurate and usually is question why a country with a 5% that it not only provides the funds linked to increases in crime. lower unemployment rate than Ma- to encourage entrepreneurism but lawi still has 65% of its population also educates the work force to en- Nonetheless, this is not to say that living below the national poverty sure this is sustainable in a global countries like Malawi are flourishmarket. ing with confident economic line, as well as undergoing

27

She could run a company Micro finance gives people financial opportunities in struggling countries

prospects. The lack of savings and access to finances in most rural areas has created a state of perpetual scarcity, a poverty cycle that restricts people's potential to improve their livelihoods. Micro finance has therefore had a less than profound impact on improving the bleak outlook for most rural regions in Africa as it has concentrated in capital cities.

microfinance" explores this issue by making the point that much of the micro credit is targeted to the very poor. As he points out, they have neither the skills nor the market opportunity to create a viable enterprise. Therefore, it leads some to believe that micro finance has little capacity to improve economic growth in Africa without the necessary infrastructure in place. This includes a viable health and education system to improve the effectiveness of the African workforce.

Due to the fact that only 2/3 of the Malawian population can read and write, it is understandable why the country's ability to capitalise on its Furthermore, the main disadvantage resources is so inefficient. of micro financing is its inability to provide an effective relief of pov- The underlying factor that influerty with most cases. This is due to ences the success of micro financthe fact that most of the investment ing is how and where it are utilised. is either too small to provide a One has to differentiate between a foundation for suitable business or profit seeking company and an aid misallocated to those who have no programme. Many micro finance business expertise. Thomas Dichter, companies have decided to invest in in his book "What's wrong with women rather than men to increase

the likelihood of repayments. However, Africa's unemployment figures state men to have a significantly larger unemployment rate (3.9%) in comparison to females (2.4%). It then becomes apparent that for micro finance to become the revolution some believe it could be, the necessary risks have to be taken to increase outreach, even though this may not be seen as a viable option for a profit seeking company.

The continent as a whole has faced many political and social reforms through the last century which have pronounced its inability to economically expand. Micro finance may therefore in the long run be limited in its effectiveness in eradicating poverty. However due to the scope and multiplicity of factors that instigate poverty, there may not be a single guaranteed approach and microfinance would clearly play a key role in any solution.

28

Which is the answer for Economic Development?

China is growing at a faster pace than any other country, with the IMF recently having forecasted economic growth to be of 10.5% for 2010, while India – also a rapidly developing country- is predicated to have reached 9.4% in the same period. China is a command economy; a market which is controlled directly by the state and the state makes all the decisions on distribution of resources, the price of products etc. Other well known command states include North Korea, Cuba and the former Soviet Union. India on the other hand is a free market economy; a market where there is no economic intervention and regulation by government. However there are no pure

free market economies because there is always some sort of government intervention but the closest of these would be democracies such as the US, UK and France.

One advantage of a command economy is that it can produce economic development at a faster rate than a free market economy. In the case of China and India, if the Chinese government want to build a road the people are evicted immediately and the road built. However for the Indian government to build a road it has to undergo a mass of paper work and protests. This is a problem which many free market economies suffer and hampers economic development. India needs to

By Aravinth Kumar spend $16 billion if it is to catch up with China‘s transport system and is one of the reasons why China is developing at such a massive pace compared to India. The lack of road networks is causing problems for the mobility of the workforce and food transportation, which currently can take days. If India can improve its road network, poverty would be severely cut as fresher food would be sold while food inflation would ease, raising their standard of living. China has the capability to build large road networks, buildings and ports in an exceptionally short time compared to India, since the Indian government can be faced by strikes, inability to get deeds of the land to

The US (Free Market) is one of the most developed and richest countries

29 build in and so forth. In the short run therefore a command economy would be seen as the most attractive alternative over a free market economy due to the ability to stimulate growth exceedingly quickly.

Poverty is major problem in these countries because it prevents capable citizens from working and generating economic growth. It also means these people are dependent on the state to supply housing and healthcare for free. A command economy is much better at reducing poverty than a free market economy but the standard of living is better in a free market economy in the long run as people have to opportunity to better themselves.

China has been able to take millions out of poverty from the 250 million in the 1980s to 30 million by 2001 while India has currently about 240 million living in poverty to date. The reason for this is that

unlike democratic countries where proposed laws need to be passed through government, a command economy can implement a law straight away as the Chinese have done with their poverty reduction policy. However not all command economies reduce poverty at such a fast rate; for example the Soviet Union had control over much of Eastern Europe which had declining growth while poverty rose.

Whist in Western Europe much of the area saw rapid growth and prosperity although it was a free market.

Command economies only work when there is strong governance and people are willing to work with the head of state for instance North Korea has become a failed state where the ideologies of communism have not been put in to practice since there are people who are ‗more equal‘ than others whereas Cuba on the other hand has become

Which is the answer for Economic Development?

The digital revolution, an ongoing process that is still taking place, has impacted the world massively over the past thirty years. Some people have lost money, and others have earned it. A world without the developments the digital revolution is now unimaginable for most. It allows the common user to indulge in thousands of resources, providing access to documents and information to videos and music.

When vinyl went to tape the world took a step forward. When these cassettes went to CD‘s and then to mp3‘s a revelation occurred. The digital revolution has been allows

developing since the 1980‘s and now us to ―purchase‖ or download media anywhere in the world. We can now get whole albums within seconds, and these albums take up no space at all. With this other technology such as peer to peer (P2P) sharing, anyone with access to the internet can access a wealth of information. This technology has been used and abused, and after illegal copies of CD‘s this was the next leap that piracy took. This freely available information meant that music under license could also be accessed freely. Music is an industry valued to be worth $32 Billion (US) in 2009 is one of the most

a richer state with one of the best healthcare systems in the world, a literacy rate of 99%, less poverty and the least crime rates compared to any of the other democratic states such as Haiti, Jamaica or even the US! The citizens support the politic ideology; therefore the control over the economy is welcomed, not seen as dictatorial. This can be seen in another command state – Saudi Arabia, where citizens are united by religion with the result that the economy is strong with GDP Per Capita at $20,400.

A free market economy takes longer to become developed but all these states have been rewarded with stabile growth and high standards of living, which shows that free market economies are better in the long run. Command economies tend to be very unstable as can be seen by the fall of the Soviet Union and North Korea.

By Ruchit Gupta successful industries out there. But can it continue to be in the face of revolution?

Several organisations have tried quantifying the figure lost to internet piracy – an important part of the phenomenon. The Institute of Policy Innovation calculated that music piracy alone costs the US economy $12.5 Billion (US); over a third of the industry‘s total worth.

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However this figure may be inaccurate as it assumes that every unpaid download is a lost sale, as there isn‘t a way of measuring how many of these unpaid download then resulted in consumers purchasing legitimate copies. Another study published by the Journal of Political Economy said that the money lost is ―not statistically approachable from zero‖, and this is further justified as an increase in illegal downloads of music did not reflect on having a negative impact on official sales.

It is clear that there is an argument here on how much music piracy really costs the industry although it must be said there is still a cost.

Recording companies lose money as 85% of their recordings are leaked and don‘t generate enough revenue to cover production costs.

Musicians, singers, songwriters, producers and all those involved in making a song don‘t get paid as

Marketing of music is another sector of the industry that spends millions. 81.87% of the entire music industry is controlled by 4 major record companies, however most artists are not signed to these major labels that spend all the money.

This results in artists not having the same radio time, video quality, publicity and marketing that other artists have access to. Therefore downloading their music for free is a great way for lesser known artists to build a name for themselves and gain the exposure. People won‘t buy music they haven‘t listened to; however downloader‘s can now find unknown artists and develop new tastes. Think of it as a process.

Without this access to the music from these unknown artists, there is no chance that downloader‘s would ever purchase the music. By downloading the music, they will either like it or go buy the albums and singles by the same artists or share the music with their friends, who as result again buy the album or even go to concerts. Thanks to this process many independent artists such as Jason Derulo or IYAZ, that don‘t have the support of major record labels, have started to rise and are now, taking a greater share of the market.

many royalties and fees. Retailers (more so the smaller ones) lose because they can‘t compete with the prices that are virtually if not completely free through downloads.

And the reduction in stores selling physical music (CD‘s and records) has meant fewer jobs and government revenues. Consumers are also losing out as a result due to the loss of sales through downloading the music causing the price of the le- It may have caused short term gitimate copies to go up, reducing losses for certain companies and consumer surplus. individuals; however in the long term the money earned is still inBut how has this evolution creasing - long term album sales strengthened the economy and are increasing. Old songs that can‘t surely the money lost in that indus- be purchased anymore are available try is merely spent elsewhere in the on the internet and a great range of economy? Retailers are losing independent artists is flourishing. money due to larger retailers and The rise of independent artists is their discounted prices or special changing the entire music industry; offers out competing smaller busi- it is a way of forcing better stannesses. It would seem only diversi- dards through competition. The fied companies with extreme only recourse left for the industry is economies of scale can survive in to take advantage of the technology this climate. to expand their industry further.

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By Akashdeep Saini

Bafana Bafana‘s early exit out of the World Cup has resulted in heartbreak for many South African citizens.

Some say it was inevitable, but the question is, why do we support our nation and put our faith, hopes and dreams in the hands of others just for them to be shattered weeks later? The answer could lie in the fact that this was an opportunity for the government, through this feat of organisation, to prove itself a capable and stable economy. South Africa did prove itself as a viable and flexible economy with the effect of vastly improving business confidence. This increased confidence in South Africa‘s government and economy is more than enough to override the cost of vandalism and the cost of increasing the number of public services such as Police to cope with thousands of drunken hooligans. However the real impacts of hosting the World Cup are long term and largely indirect, along with the direct impacts I will be alluding to. All of this makes the prospect of hosting a world cup a lucrative investment opportunity.

1995 Rugby World Cup being held in the country as tourism has increased by 200% since 1994. Foreigners visiting the country for the first time found it an attractive region, business contacts were made and the countries exposure as a tourist hot spot grew; leading to a sustained rise in tourism. Therefore, even after the Football World Cup has finished, South African‘s will enjoy the fruits of their labour – stronger growth and long run development. However, other sporting events such as the Cricket World Cup and the African Cup of Nations also occurred in South Africa between 1995 and 2010 so these could also have been contributing factors to enhancing tourism. On the other hand, 3.9 million foreign visitors arrived in South Africa in 1994 while in 1997; just two years after the Rugby World Cup 5.2 million foreigners visited the country. Therefore even if the other sporting events contribute to the increase in tourism, they are overshadowed by the largest – the world cup.

The South African construction and telecommunicaA highly notable positive aspect is the increase in tour- tion industries have also boomed as a result of the ism which creates many new jobs. It was estimated that World Cup. Employment in telecommunications has 400,000 people visited the country for the biggest been augmented largely by a demand for broadcasting during the event while jobs for builders increased due to the demand for new stadiums, roads and transport links to handle such an influx. The stadiums will continue to be used after the World Cup and consequently bring further revenue to the country through the national league matches. In addition to the revenue generated by the 159,000 new jobs created, it is likely that the sale of replica jerseys and other World Cup related apparel will create huge profits. During the 2006 FIFA World Cup, in Germany, it was estimated that $3 billion was produced by retail outlets selling attire of this nature. If a similar amount of money is obtained, aggregate demand in the economy will be boosted draTourism statistics for South Africa show promising figures. matically due to the increase injection into consumpHas the World Cup give an even bigger boost? tion. This has the effect of kick-starting South Africa‘s sporting event in the world. Most, if not all, of these economy; real GDP increased by 4.6% during the first people would be taking part in the tourism industry quarter of 2010, we can expect this trend to continue whether safaris or sightseeing and the immediate effect thanks to the booming of these various industries. would be the tourist‘s expenditure on hotels, restaurants and travel but this is outweighed by the effect on The most important effect the World Cup could have the future of tourism in South Africa. From 1997 to for South Africa is good publicity. It is vital because it 2007 tourism in South Africa has continued to increase will be a magnet for foreign investors all over the steadily. It is clear that this is strongly linked to the globe. Having hosted the most widely viewed

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tournament in the world, South Africa has gained itself international recognition and has proven itself a safe environment in the midst of an investment risky continent.

It is likely we will see investment in areas where South Africa has a comparative advantage or has scarcity power over an industry, for example in raw materials.

Taking into account that South Africa is an economy rich in minerals, has a well established mining industry and 60% of exports are taken up by these minerals, investment of secondary industry where these minerals are processed and manufactured into goods could create entire markets.

The FIFA World Cup 2010 will be remembered forever all over the globe. South Africa must capitalise on the publicity they have achieved and seize the opportunity to expand its infrastructure using the additional revenue obtained in order to undergo sustained growth, increase GDP per capita and raise living standards in Can South Africa lock horns with more powerful economies? the long run.

By Faheem Sheikh

The Soviet Union was a superpower, a cultural, political, military and economic master of the world and was able to convert half the world to communism before it crumbled on December 31, 1991. Under president Putin, Russia grew quickly in the energy sector and it soon became in 2009 the world's largest natural gas exporter and the second largest oil exporter. Additionally, with Europe‘s dependence on Russia‘s energy reserves, it quickly became highly influential in politics. This economic power and highly influential country has certainly prompted the question, is Russia a superpower in the 21st century?

Russia has political status of a UN Security Council member which itself proves it to be a powerful nation.

Additionally, Russia claims influence in emerging powers of Central Asian nations and the quickly

developing Eastern Europe. In reality, this nation has a massive influence in Europe as 38.7% of gas imports came from Russia as stated by the European commission. Nations such as Lithuania, Finland, Estonia and Latvia import all their gas from Russia. In the short term these are characteristics of a political superpower as nearly 832 million people consume Russian gas every day. However, in the long term it seems that Russian political influence is decreasing. Firstly, Central Asian nations are now facing Islamization threats from growing groups such as Hizb Ut Tahrir who wish an end to the influence of Russia. Additionally, Russian reduction of gas to nations such as Ukraine and newly Belarus has caused rifts amongst its allies, harming ―Russian influence‖. With China already planning to receive 25.7m tonnes of oil from Central Asia and heavy Chinese investment in Central Asian energy companies such as MangistauMunaiGaz for $2.6bn and KazMunaiGaz for $939million, Central Asia is beginning to distance itself already from the influence of its primary competitor. Additionally, Europe is looking to Central Asia and has already invested $25billion into the Shah-Deniz project. It seems Russia will soon lose its large political hold on nations

33 saw signs of recovery, with 5 per cent year-on-year growth and the stock market up 130 per cent on last year.‖ The Russian economy needs to adapt to a wider variety of goods and services in order to be a superpower in the long term. It also has to be taken into account that a weak economy, pinned to the price of oil, with disappointing negative FDI growth of 21 percent in 2009 leading to $81.9 billion is incomparable to the superpower- USA which achieved net FDI flows of $ 207.74 billion. and therefore its title of superpower.

The status of a nation‘s economy seems to be the real measure of power in the 21st century. Russia is an energy superpower as it is the largest exporter of natural gas; it has the second largest coal deposits and is the eighth largest exporter of oil. Additionally, it is the largest net exporter of energy to Europe. With such responsibility it is evident that this economic advantage places Russia as a powerful nation, as it has influence over 50 nations. However, Russia‘s bullish behaviour to Ukraine in the gas disputes of 2006 show that Europe is looking elsewhere for gas. The proposed Nabucco pipeline could end Russian trade as the pipeline will begin trade between the oil rich Azerbaijan and soon Iran. As mentioned in "The Devil We Know: Dealing with the New Iranian Superpower" by Robert Baer which claims that Iran‘s energy reserves are equal to both Russia and Saudi Arabia. Russia‘s claim of energy superpower could be destroyed if Iranian and European oil and gas trade begin. On the Eastern Frontier, China eyes Central Asian states specifically Kazakhstan for gas. Central Asia have a good level of oil and gas reserves however Russia is far ahead in both oil and gas production; producing nearly 3 times more gas than all the Central Asian nations put together.

However, Russia must now grow in order to maintain its status of a superpower. If Europe and China continue developments and imports from Central Asia, Russia will not be able to create a foundation that it needs to kick start its slowing economy which was hit by the global recession. As the Financial Times reports ―after an 8 per cent decline in GDP in 2009, January

Military power is a key aspect when measuring the status of a nation‘s power. Russia‘s military has embarrassingly reduced from first to eighth on the rank of total number of troops. The supply of nuclear weapons in Russia is second to the USA with a supply of 3909 rockets as stated by the US Bureau of Verification.

However, Russia‘s arsenal has simply served to offend its ―allies‖ from time to time as we have seen with Georgia.

In conclusion, Russia is a short term superpower. It has the significant military, political, cultural and economic power to be considered a superpower right now.

However, in the long term it is evident that its political and cultural hold will die out due to its foreign policy.

To keep the title of a superpower, Russia needs to reform foreign and social policy. Its economy is seen as ―geared primarily towards consumption, rather than investment,‖. A restoration of good will between Europe and themselves would maintain its large energy trade but also increase the foreign investment that is needed to grow the energy market and fast growing service market. Additionally, bribery has become a deterrent for investors in Russia and last year it was estimated to be worth $300billion according to BBC news. The Deutsche Bank economist Markus Jaeger alluded to this in his comments on investment; ―(invest) In India or China, where the income per capita grows together with the population or in Russia, where the income per capita is growing, but the consumer market is shrinking?" Therefore, Russia must quickly adapt to change, as competition arises from other Energy powers or it may never hold the title of superpower in the 21st century.

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The Bottom Billion: why the poorest countries are failing and what can be done about it

By Nisha Udayakumar

Staring into the eyes of the young man on the cover of

Paul Collier OUP Oxford 2007 ISBN: 978-0-19-537463-6

Collier cuts to the chase in the preface, explaining that Malawi has always been and always will be ‗dirt poor‘, unless something is done. ‗This book is about that ―unless‖ ‘ is the underlying thesis of the book and sets up the rest of the book. Collier explains how he sees the grouping of people in the world: around one billion at the top – the richest people, four billion people living in developing countries including China and India, and one billion people at the bottom,‘ the bottom billion‘, living in countries that are not developing, remaining ‗stagnated‘.

the book, I soon realised that this was no young man, but a (very) young boy, perhaps not much older than thirteen, maybe fourteen years. The sickening image of young boys clasping guns in their hands and being forced to fight is one that as a society, we have unfortunately become all too familiar with. And after seeing this very image on the cover of the book, I fully expected the following 195 pages to be filled with stories of young children in war-torn countries, mostly in Africa, affected by drought and famine and I anticipated accounts of their constant struggles during everyday Every page contains numbers and figures, backing up life. everything that Collier writes. He claims in the preface I was wrong. What I did read in the following 195 that he will be using statistical evidence as an ‗image pages was, quite unexpectedly, exactly what had been smasher‘, and boy did he mean it! After opening the explained in the title ‗The Bottom Billion: why the book at a random page, page 56, I am greeted with a poorest countries are failing and what can be done mass of numbers at the bottom of the page, a typical about it‘. Collier has structured the book in such a way Collieresque sentence, ‗The global average was that if that he goes from ‗What‘s the Issue‘, to explaining in a country‘s neighbours grew by an additional 1 perhis own terms what is wrong with the poorest nations cent, the country grew at an additional 0.4 percent‘ and in the world, to explaining what can be done to resolve ‗...for the landlocked the spillover is not 0.4 percent the problem, all written in a logical, easy-to-read style. but 0.7 percent‘. The use of the extensive magnitude of Collier‘s book is like a can of Ronseal; it does exactly figures provides an insight into the volume of work and research that must have gone into writing the book. what it says on the tin (or on the cover in this case).

35 This coupled with the many passionate and emotive sentences punctured sporadically throughout, ‗It matters to us‘, ‗And it matters now‘, is for me one of the greatest assets of the book, signalling that Collier did not write it for the sake of writing a book and raising his bank balance, but because he is genuinely passionate about helping people of countries at the complete opposite end of the scale to us.

However, as well as being one of the greatest assets of the book, I feel the overuse of numbers and statistics holds the potential of the book back. There are just too many figures and Collier seems to have tried to fit as many statistics as possible onto each page and I consider this to be a major flaw. For me the use of the mass of figures interrupts the flow of the book, preventing it from what it can and should be – a flowing, interesting read that educates the reader; not the business section of the Financial Times.

these ‗traps‘ are probabilistic statements about problems that the poorest countries are likely to have, rather than actual explanations of why they are so poor.

For example Switzerland and Botswana, though landlocked, are not part of the bottom billion. Collier attempts (unsuccessfully) to gloss over these exceptions but the truth is that not all countries falling into these ‗traps‘ end up in the bottom billion, and not all countries in the bottom billion fall into these traps. It seems ironic that Collier exhibits pinpoint accuracy in his statistics throughout the book, but at the point that is most important he is inconsistent and dare I say it, almost careless?

However the real brilliance of the book lies in the final chapter(s). Not only does Collier comment on the problem facing the bottom billion, but he actually sets out a plan to untangle the mess, and this is a part to be favoured. He sets out what he calls ‗An agenda for action‘ and in it he lists some of his suggestions, which on the whole if implemented, could and should work.

Perhaps the one suggestion that is most controversial and the one I agree with least is ‗military intervention‘, especially after the ―success‖ of the Iraq war and the current fragility of economies around the world – new wars are not needed at the moment. Perhaps Collier is Collier goes on to explain why he believes that the bot- writing more from his heart than his head here. tom billion have remained rooted to the bottom of the scale, while other countries in the world have devel- But 195 pages of jargon-free, informative writing oped and are developing at unprecedented rates. He about a real and pressing world situation is a breath of explains that the countries of the bottom billion, mostly fresh air in a market where new books fail to address concentrated in Africa and central Asia, have been the problem directly. In ‗The Bottom Billion‘ Paul caught in one or more ‗traps‘: the conflict trap, the Collier has not only addressed the problem, but he has natural resource trap, landlocked with bad neighbours, provided a solution as well. Personally I believe that the book is absolutely unique – exquisitely brilliant in bad governance in a small country. places and majorly flawed in others; it isn‘t perfect but I believe that grouping such a large variety of coun- it can be and perhaps should have been. For me it‘s the tries into these four main groups is another flaw, as Diego Maradona of books.

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Outliers: The Story of Success

By Ravinder Kang

In my mind, success is achieving something which has come about due to hard work and determination. However in today‘s society, those who have had tremendous success, such as Bill Gates, The Beatles and Mozart are all considered to have been born with their extraordinary abilities, and achieved what they have completely independently. Is this the case though? Gladwell argues against this in his book, ―Outliers‖, stating that it was not only the fact they possessed innate skill but also their success is partly due to the time they were born, the 10,000 hour rule (whereby those individuals who spend the longest working in their field gain an advantage) and more importantly, luck.

The book explores the success stories of some of these most profound names in the world today, and identifies the factors that contributed to their success, factors which you may have thought irrelevant at the time.

From reading I have learnt that the definition of success, in my mind, has taken on a slightly different meaning

Malcolm Gladwell Allen Lane 2008 ISBN: 978-1846141218

It would sound peculiar to most to say that there was a perfect date to be born, or even that there was a threshold of time before one would be considered good enough to be an expert in a specific field. Gladwell asks us to consider hockey players in the first chapter.

January 1st is the standard amateur and professional cut -off date for Hockey leagues. Therefore those born closest to the cut-off date are more likely to be better than those born at the other end, December. Why? Well those 40% born within three months of January are stronger, bigger and have had more practice (Closer to achieving the 10,000 hour rule), they therefore gain an advantage that even at a young age causes them to be singled out for extra training, further developing their skills and expanding the ability gap between them and their peers. Therefore those born closest to this ideal date are considered to have the most potential, and are then scouted for the best teams and go on to achieve great things, simple.

Consider Bill Gates. He is now one of the richest, most influential men in the world. Surely he was always destined to become the founder of the biggest computer software company in the world, regardless of the year he was born? Gladwell explains in this section, like

37 most, that luck, time and 10,000 hours play a huge part. By the time he had finished high school (college) he had racked up an incredible 10,000 hours of programming time. How? He was lucky enough to go to a school where the mothers of the sons who attended, were wealthy enough to buy a sophisticated computer for him to practice with. And the time he was born?

October 28th 1955, at the dawn of the computer programming age. Coincidence? He continues to amaze by referencing Mozart and The Beatles, saying their success resulted because of these 3 main concepts, your birth date, the time at which you are born, and the 10,000 hour rule.

Jewish parents who had specialized in the garment industry. This type of work supposedly offered, "autonomy, complexity, and a connection between effort and reward‖, and taught the next generation how anything is possible with hard work. In a sense, if they wanted to, they could ―shape the world to your desires‖, or theirs in this case. However, these Jewish immigrants clearly were not shaping the world in any way or form. Working 100 hour weeks in horrendous conditions for small pay is clearly not a desire for any human being. And if I am terribly wrong and they loved their work, why were the children urged to go into professions such as doctors and lawyers?

So we have three examples, of these three rules leading to three completely different people becoming three of the most influential people in the world? Maybe Gladwell has a point, just maybe. As intrigued as I was, I was still unsure. As brilliant as the book is, he has only explored those who apply to these rules. What about the thousands of other people who have had just as much success but did not apply to any of them?

This is the only book I have ever read which has had me questioning everything put forward by the author.

For this reason, I loved it. For a book to mentally challenge me so much is definitely a success. I found it fascinating, compelling and extremely frustrating but in a very positive way. The theories are backed up by stacks of evidence and are not farfetched by any means. All are fathomable but small holes allow the reader to query them which is always a good thing. My understanding of success has changed slightly since the beginning. I now believe, success can be achieved through hard work and determination, but being an outlier definitely helps.

Ever thought being Jewish was an advantage to being a lawyer in the 1930s? This is apparently the case. However it is here in the book we begin to see Gladwell‘s logic turn slightly sour. He says that these lawyers had

38

Globalization and its Discontents

By Hashim Dangra

Joseph E. Stiglitz Penguin 2003 ISBN: 978-0141010380

The Nobel Prize winner who wrote this book certainly

account the public‘s view, and they are able to get

got many people‘s attentions, with over one million copies sold worldwide. He served in key advisory positions during interesting times, first as chairman of President Clinton‘s Council of Economic Advisers and then as chief economist at the World Bank during the East Asian financial crisis. Some say that he is the economist‘s economist.

away with this as they do not refer to the nation‘s courts. Environmental, labour, and capital laws are all resolved without any interference from anyone, apart from the thousands of activists, who protest against the IMF, WTO and World Bank, that Stiglitz shows his sympathy for.

The title speaks for itself however the contents of the book beg to differ. Throughout the book Stiglitz does not directly define globalisation. The main theme of the book is not the analysis of the link between ideology, politics, and economic performance in a globalised world. Rather, the author keeps concentrating on bad policymaking carried out both by Western national governments and by international organizations such as the IMF. He puts forward a direct causal link between globalisation and bad policymaking, and concludes by suggesting suitable rules for global economic management.

Stiglitz goes on against IMF officials throughout the book and claims that they wrongly assumed to know how best to manage economies throughout the world.

In East Asia's financial crisis, Russia's failed conversion to a market economy, failed development in subSaharan Africa, and financial meltdown in Argentina, Stiglitz argues that IMF policies contributed to a disaster. His theories suggest that the IMF had special interests for multinational corporations, enriching them and undermine the growth of democracy.

Even though his claim is correct, and is backed up by much evidence, he himself commits the same kind of error. He puts forward his solution to the problem The author argues that the IMF, WTO, and World which is the belief that the IMF and World Bank Bank lack transparency and accountability. The deci- should be reformed, not dismantled. Due to the global sions that these organisations make do not take into issues at the time, with a growing population, malaria

39 and AIDS pandemics, and global environmental challenges he promotes a gradual, sequential, and selective approach to institutional development, land reform and privatisation, worker safety nets, health services, and education. Different countries will need to follow different paths. He claims to know both which reforms are best and the right sequence in which to apply them.

But wasn‘t that the same mentality of the IMF officials, where they knew what was best for the world?

Why should one believe that he is any better at outguessing markets than officials at the IMF?

Professor Stiglitz also ignores problems with special interests that he himself identifies in the book. There is no reason to believe that the policies he recommends, if correct, would win out over special interests. Stiglitz himself admits that existing international agencies are political (pp 166, 196), and says that there is no reason to expect anything different from any future agencies.

The world we live in today is very different to that of the world that Stiglitz lived in when he wrote his book.

Having just started recovering from an economic disaster, and with all the other issues, such as environmental challenges, the world has become a more united place.

Posted on the 11th July 2010 on IMF direct: ‗Asia‘s voice is getting louder and the IMF—and, indeed, the world—is listening. Blogging from the IMF and government of Korea-sponsored ―Asia 21‖ conference in Daejeon, Korea, IMF Deputy Managing Director Naoyuki Shinohara reflects on the rise of Asia‘s voice and leadership in global economic policymaking.

The calibre of conference participants and the quality of dialogue speak volumes about the range and depth of expertise and experience in the region. The world needs Asian leadership, not only to sustain global growth, but also to develop policy mechanisms to contend with tomorrow‘s economic challenges.‘ Joseph Stiglitz wrote this book to show the world how globalisation works in reality, and he gave the readers an insight on how the international organisations, which he once worked for, functioned. He also outlined his views on how to make these organisations better to some extent, and had pictured a future where the IMF and other organisations would be the way he thought best for the world. Almost a decade has gone by and it is safe to say that globalisation has helped the world through rough times, and will help us in the future that is to come.

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Predictably Irrational: The Hidden Forces that Shape Our Decisions

By Callum Bruce

In a field of economics desperately in need of realisation of its potential, Dan Ariely provides the evidence and explanation of why behavioural economics could change the world. Chapter after chapter, he enumerates the minutiae that make us so ―systematically and predictably‖ irrational. For instance, in a survey of the effect of ‗arousal‘ on decision making, his research found that the likelihood of someone using a drug to increase their chances of sex increased by 420% when aroused in an amusing experiment involving college boys and pornography. It is this colloquial style of work that is used to highlight serious problems with our assumption of the consistently rational ‗Homo Economicus‘ that I found so refreshing and stimulating.

Dan Ariely HarperCollins 2008 ISBN: 978-0007256525

seems to have a crucial part to play in our behaviour.

He points out that an ―emotional chasm‖ forms between owners and non-owners is so large that in one case it allowed the owners to value a basketball ticket 14 times higher than those who had failed to obtain one. An eBay auction works by some of the same processes as bidders imagine having the product and partial ownership develops that causes us to value it higher than we originally intended.

The backbone of each chapter is a series of experiments that all prove the effect of the chapter topic.

However, I feel a pinch of salt is necessary as these experiments are often very short and rarely repeated; a point Ariely fails to justify. I suppose the reason for this may be the lack of ambiguity in the results he produces. It is hard to doubt that cheating increased when cash was replaced with tokens (that were almost immediately traded for cash) in an investigation into cheating, when his results showed that it doubled the The obsession with ―FREE!‖, our inability to allow amount of fraud that takes place. options to close forever, and the ‗endowment effect‘ of overvaluing everything we own (or may own), he says What is so brilliant about this book is about how appliare all linked to our fundamental aversion to loss, cable it is to every reader, I found that I often stopped which, giving that these are three separate chapters reading to remember countless occasions I surrendered

41 to the allure of ―FREE!‖ or procrastinated in handing in homeworks. Ariely himself, surely a master of this by now, admits that he has yet to conquer his irrational id. In the expanded edition he applies some of his theories to the economic crisis: our lack of self control over spending due in part having by too few regulations (giving us too much flexibility to overspend) and how bankers act irresponsibly with complex derivatives since they‘re no longer recognisable as money. He even explained that one of the reasons we hate banks so much is the way they‘ve tried to create social norms in this cauldron of capitalist activity; of course it is all fine…until something goes wrong. In 2008, a lot went badly wrong, and the sudden violation of social norms by those of the market many found to be insulting.

and steal), lust (arousal) and envy (relativity) all play direct roles in this book. The more pious readers will probably feel justified when they realise this. I personally felt that this gave a sense of helplessness over these elementary characteristics of man, not helped by the fact that Ariely‘s search for solutions were either somewhat brief or utterly absent.

Overall, the book succeeds in justifying its own existence and therefore that too of behavioural economics.

Ariely‘s style is incredibly warm, casual and undeniably lucid and he takes a good step in putting the spotlight on the psychological area of behavioural economics which has been dominated by the intricate, complicated and mathematical world of game theory in recent years. This book is a must read for anyone remotely interested in economics or psychology and it provides an excellent tool for extracting any real passion for either of the subjects without scaring you off comSomething I found extraordinary was some of the par- pletely like those about game theory repeatedly do. allels between these irrationalities and the seven deadly Brief but brilliant. sins. Pride (endowment effect), greed (how we cheat

42

Wikinomics: How Mass Collaboration Changes Everything

By Kamlesh Walia

Business

models and consumer behaviour has changed rapidly as a by-product of the speedy development of the internet and the worldwide web to the web 2.0. The web 2.0 is defined as the second generation of websites which allows people with no specialised technical knowledge to create their own websites, to selfpublish, create and upload audio and video files, share photos and information and complete a variety of other tasks. The emergence of businesses that have achieved great growth and success as a result of utilising this new phenomenon of the ‗web 2.0‘ has shaken the economy. It has filled the economy with entrepreneurs that think in alterative and innovative ways. This in turn has petrified and overwhelmed business managers and directors of ‗traditional‘ businesses all over the world.

The title, ‗Wikinomics‘ can be defined as the theory and practice of harnessing the power of mass collaboration. Your eyes and attention are automatically drawn to it from a packed shelf of books on

Don Tapscott & Anthony Willians Portfolio 2006 ISBN: 978-1591841388

economics, perhaps because in this day and age the web 2.0 revolution has gripped us all, may it be Facebook, Youtube, lickr or the like. However, although we may think of the book as a bit of fun about the web 2.0, it is packed with concepts, anecdotes and statistics which help us to understand just how important this revolution is and how mass collaboration changes everything. It is a very easy and engaging read that makes books like ‗Freakonomics‘ look like something from space.

The main economic theories in this book are no new concepts, but just developments of old theories, the main one being that a larger labour force is better than a smaller one. Although recently, since the industrial revolution, this theory has been less widely accepted as it is believed that machines are more powerful that people, this book demonstrates how people power can dwarf the power of machines.

The book starts with the significant success story of Goldcorp, a gold-mining company in Canada. The company was ―struggling, besieged by strikes‖ and had ―lingering debts and an exceedingly high cost of production, which had caused them to cease mining

43 operations.‖ The company was having difficulty discovering substantial new gold deposits and as a result of this the CEO, Rob McEwen, made the controversial decision to release all the companies geological data and make it available to everyone, something that had never been done before as this data is usually kept very secretively. After releasing this data in the form as a competition, professionals from all types of backgrounds, from mathematicians to military officers and computer technicians worked on the problem to come up with some solutions. In the years after this competition (2000-2004), the company went from $100 million to $9 billion. Demonstrating that something machinery couldn‘t do was solved by the mass collaboration of people from all around the world. Towards the end, the

authors argue that firms who do not change their current structures will perish and companies that utilise mass collaboration and the web 2.0 will dominate their respective markets. Although I agree with this statement to some extent, I do believe it is a very bold statement and that only if the structures are changed to accommodate for the web 2.0 revolution, that companies have a chance of success.

This book is a very formative one that combines description and advice. For the average business manager, this book could be an inspirational one that could potentially encourage businesses to innovate in new ways and use the web 2.0 revolution to their advantage like some of the companies in the book.

44

More Sex is Safer Sex: The Unconventional Wisdom of Economics

By David Liu

Everybody

has heard of the bestselling economics books Freakonomics, The Tipping Point, and Blink.

More Sex Is Safer Sex is another in the same breed of popular economics books by Steven Landsburg. The author, most well known for bringing The Armchair Economist to the world, arguably started the bandwagon of related books with his regular column Everyday Economics in Slate magazine – a column boasting the flow of wacky ideas from a genius.

Each chapter is based on a mini essay from the longrunning column, outlining a counterintuitive idea.

Landsburg covers a wide range of problems in his latest book including fixing the justice system by creating financial incentives (and punishments) for juries, arguing that girls cause more divorce than boys (or parents are forced to stay together for the sake of boys) and showing that it is, in fact, more worthwhile using the death penalty on ―vermiscripters‖ (creators of computer viruses) rather than murderers.

Steven E. Landsburg Pocket Books 2007 ISBN: 978-1416532217

The book jumps straight to the point with More Sex Is Safer Sex where Landsburg explains the ―sin of restraint‖. He suggests that if the sexually conservative became more sexually active, the whole pool of partners increases and therefore the chance of sleeping with a sexually active person with a higher risk of an STD decreases. Clearly this means that becoming sexually inactive reduces the fraction of STD free partners. He goes on to argue that this sexual restraint is like pollution – polluters continue to pollute as the majority of benefits of becoming green goes to others, similar to how the sexually conservative continue to stay out of the mating game as all the benefits (other than pleasure) go straight to the other‘s future partners.

To encourage greater sexual activity, Landsburg suggests the solution of subsidising sex (in the form of condoms) – but only for the sexually conservative, with the resulting benefits being more sex and less illness.

These absurd solutions seem almost acceptable when following Landsburg‘s train of thought, however, he gets to his conclusion purely based on logic. He is very myopic in his actions – not once does he use any experimental hard data or field research and I feel this

45 holds the book back from reaching that next level. It fact charitable because by consuming less there is more will inevitably result in many readers and academics left over for someone else. The main argument against seriously questioning against any truth in his points.

Scrooge is that he did not help any of his workers or neighbours. But logically whilst they may have been On the other hand, I wouldn‘t be surprised if his inten- starving because of low wages, this allowed the food to tion was to create controversy. Very often he exagger- feed someone else – the point being that giving charity ates the point he is trying to make with metaphors. One to one person, removes the ability to consume the good example that springs to mind is in the chapter Things from another. Scrooge may have acted differently had That Make Me Squirm where Landsburg equates re- he lived in a different time as incentives differ with moving the life support of Terri Schiavo, a woman in a cultures. ―permanent state of unconsciousness tantamount to death‖, to throwing out a toaster. In another context it Throughout the book Landsburg emphasizes the immay be humourous but when attributed to a real per- portance of incentives, perhaps drilling the point home son, the throwaway statement is tactless. However on too much. Almost all his solutions come from changthe whole, he uses clever wit to good effect – for ex- ing them. How do we fix politics? Incentives. How do ample, when stating that a computer increases produc- we fix the justice system? Incentives. How do we fight tivity and pay by 10%-15%, a passing comment of fire?... The point being More Sex Is Safer Sex uses only ―This might surprise you, especially if your screen is a few basic textbook theories – e.g. improved incenso crowded with instant-message windows that you tives, taxes and subsidies. can barely find your solitaire game‖.

Only those without basic economic knowledge will be One of my favourite parts of the book is where Lands- challenged, however it is still an interesting read that I burg seemingly proves that stinginess is actually a would recommend. It is not a perfectly rounded book form of charity. Using Ebenezer Scrooge as an exam- but it does not try to be. Landsburg sums up the pros of ple, he argues that misers who hoard their money are the book perfectly – ―counterintuitive truths are both making a withdrawal from the economy, and therefore enlightening and fun.‖ reducing prices. He goes on to say that Scrooge was in

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