Equilibrium September 2010

September 2010

EQUILIBRIUM FRESHERS’ ISSUE The impact of Graduate Taxes & Student Accomodation Prices

OPINION

The end of the FSA? Asia- forces to be reckoned with

EXCLUSIVE Uncovering the

ver coTaxes derGraduate UnExploring Economist

Look out2010 -2011

EVENTS CALENDAR Inside!

MEET THE COMMITTEE PRESIDENT //

SCOTT ROSENTHAL CHAIRMAN //

EVENTS VP //

RASMUS ADLER WAHLBERG

DAVID KINZEL

TREASURER //

EQUILIBRIUM EDITOR //

FRANCES TULLEY

MICHAEL KELLY EQUILIBRIUM TECHNICAL //

CECILY LIU

EWAH WAN YELENA PALMER

MARKETING VP //

MARKETING OFFICER //

WILL TWEMLOW

PIOTR WETMANSKI

ECONOMICS VP //

SOCIAL VP //

ANISH MAJMUDAR

PRANAV MATHUR

EQUILIBRIUM VICE-EDITOR //

SPONSORSHIP VP //

CONRAD BARTOS

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CONTENTS E DITOR I AL FE AT URE S

The state of the world economy is probably the last thing on the minds of bright eyed students as they embark on the exciting journey of University.

But after the roller coaster of Freshers’ Week becomes a blurry memory, the fascinating and complex world of economics will come into sharp focus for many as they start their studies, and this is where Equilibrium is here to help.

Through providing a wide range of articles which reflect the diverse interests of UCL students we hope to stimulate debate and spark curiosity within our readership.

In this issue, J.J. Bell discusses the proposed graduate tax which could have far reaching consequences for UCL and Michael Kelly explains the changing landscape of the financial services industry and its future. Alongside this Cecily Liu investigates recent trends of the housing market and its implications for students and Swamit Mehta offers an insight into the rise of two global players – India and China.

You will also find an interview with Tim Harford, the famous financial journalist, whom the EFS will have the pleasure of welcoming as a guest speaker at UCL later this year. As well, we have compiled a list of exciting events for your calendar.

The fast moving events of the world stage can sometimes seem incomprehensible and so intertwined that it’s difficult to know where to begin, but we hope that Equilibrium will be your starting point.

02 04 08 12 16 18 20 22

MEET THE COMMITTEE UK GRADUATE TAX THE FATE OF THE CITY’S FINANCIAL WATCHDOG UNCOVERING THE UNDERCOVER ECONOMIST UK UNIVERSITY ACCOMODATION MARKET CHINA VS. INDIA 2010 ECONOMICS CONFERENCE REVIEW 2010 - 2011 EVENTS CALENDAR

EDITO R IA L BOA R D

MICHAEL KELLY //

CECILY LIU //

EWAH WAN //

EDITOR

VICE-EDITOR

EQUILIBRIUM TECHNICAL

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CABLE’S GRADUATION BLUNDER?

T

he question of how funding for further education might change has been an extremely grey area since the coalition machine whirred into motion at the end of May. Between the Liberal Democrat flagship policy and manifesto commitment to scrap tuition fees, and the Conservative commitment to increase the number of university places there has been a lot of scope for a sober and rational rethink of what our university funding scheme should look like.

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By J.J. Bell

The dire state of the UK’s public finances is in fact a boon – it is finally politically possible to shape the system in a way that is fairer, freer and more affordable.

This is why it is doubly worrying that one of the options that has gained so much momentum is the graduate tax. According to Vince Cable, the tax has not only found traction within his own department of Business, Innovation and Skills (where the policy originated), but is also supported at the Treasury, and Number 10. The will to keep the coalition together at any cost is admirable, but when the practical reality of that political harmony is the graduate tax, there is cause for concern.

The implication that anything correlated with increased income should be taxed leads to absurd conclusions, such as a tax on tall men or a tax on those who have a high IQ. In fact, such taxes would likely result in fewer distortionary incentives than one which discourages education, since one cannot choose to be tall, but can choose not to educate oneself. Once you start taxing graduates, does that not mean you have a moral imperative to also tax other groups whose income is boosted at the state’s expense, such as NHS treated leukaemia survivors, or entrepreneurs whose businesses are given a grant to locate in an unfashionable area?

Furthermore, if the tax were to be implemented at the 5% level that the National Union of Students (NUS) has

suggested to Lord Browne (who is conducting a review of university fees) this would almost certainly be too high. Most econometric studies to estimate the earnings boost a degree provides (around £100,000) are based on long term data analysis, from a bygone period where generally only the best and brightest studied at university. The fact that a university education no longer bestows a free pass into a professional career (check-out workers at Marks and Spencer are now likely to have a degree) suggests that Labour’s goal of sending 50% of the population to university, has failed to have its desired effect in reducing inequality of opportunity, but has instead inflated employment requirements. This means that the calculated effect of holding a degree is likely to be overstated, as like (a degree from 1971) is not being compared with like (a 2008 BA).

The counter argument put forward by Cable that not just any graduate would pay, but only a graduate earning over a respectable £15,000 is not important. The fact that there are hundreds of factors at play in the determination of one’s salary, not only height, gender and intelligence, but also motivation, ambition, physical attractiveness and cultural background to name a few shows that Cable is guilty of making an age old statistical error – that of confusing correlation with causation. A graduate earning over the £15,000 NUS-endorsed threshold may well be earning more money because of the degree, but equally these higher earnings could be the result of hard graft post qualification, or additional training.

The fact that so many graduates end up working in fields unrelated to their academic discipline only serves the point - although many graduates choose courses for the transferable analytical and research skills they obtain, there are also examples from the celebrity world of graduates that end up working in traditionally non-graduate professions. Should UCL and Coldplay’s Chris Martin really be made to pay 5% of his considerable earnings over £15,000 for the transferable skills he learned studying Greek and Latin? One would also do well to note that some of Britain’s best known and richest entrepreneurs such as Richard Branson and Alan Sugar never went to university.

The answer is that as

soon as choice is offered, in-

dividuals should be expected to pay for their preferences

The argument hinges on where the state cut-off line is drawn. Most voters agree that the government should provide funding for a certain level of education, and it is generally agreed that this should be up to the age of 18 when the majority of the population has left full time schooling. There is another strong argument to fund higher education up to whatever level an individual wishes to pursue it, in the interest of creating a more meritocratic society in which parental income is no barrier to educational achievement.

However, there is also a compelling argument that the state should only fund education for as long as it is compulsory, that is until the age of sixteen. If it is a decision of the elected representatives that this is the minimum level of education that a child should receive, then there is no real alternative to funding schools to that level for all. However, if

today’s technological age demands that a degree is necessary before one can add value to a business, then governments should instead provide this level free of charge. Of course not every student has the desire or capability to make the most of university, much as not every student has the desire to make the most of his/her school years. The answer is that as soon as choice is offered, individuals should be expected to pay for their preferences.

Indeed, introducing tuition fees for 6th form students would remove some of the inconsistency in the existing education funding system, alleviating some the injustice to which Cable himself refers, “there was also a sense of unfairness articulated by Alan Johnson when he was Minister: why should a young postman contribute through his tax to pay for an already privileged group to avoid earning a living for three years and then emerge with higher earnings potential?” This sentiment is just as true when aimed at 6th form funding as when used stating the case against free Higher Education, it is wrong to expect one section of society to pay for the education of another.

This is why the current system of tuition fee payments is one of the least rotten apples on the table. The element of meritocracy is maintained, in so much as that fees are not payable immediately (in fact, only once earning over £15,000) so lack of means is rarely a cause for not attending.

Another option being touted is raising tuition fees to around £7,000 per year, at which point research shows that applicants start becoming uncomfortable with the level of debt.

Unfortunately, this still gives students no stake in the actual cost of their tuition, with expensive courses such as Medicine being subsidised by cheaper options such as English.

Of course for some courses at some institutions, the model of charging a percentage of future income may in fact be an appropriate funding mechanism. In career-oriented degrees such as Engineering, Economics, Medicine and Law where the likelihood of taking a job with at least some relevance to the subject matter is greater, the boost in earnings would more than compensate the university for the time and trouble taken in educating the next generation. The problem starts when such a system becomes the default, leaving students no choice as to what form of charge they will receive.

The problem starts when such a system becomes the default, leaving students no choice as to what form of charge they will receive.

Ultimately, Universities should be much freer to fund their courses and research in whatever way they see fit, be that through higher (or even variable with course) tuition fees, a consensual arrangement stipulating percentage of future earnings or any other scheme that pops into the head of a Vice-Chancellor. Governments should not only provide loans to students, but also support the innovation within funding mechanisms, which would not only benefit the individual through widening access and the university through improving its reputation, but also the government itself through higher tax receipts.

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Morgan Stanley is an equal opportunity/affirmative action employer committed to workforce diversity. (M/F/D/V) © 2010 Morgan Stanley

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CPMA

WHITHER NOW,

FSA?

By Michael Kelly

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FSA

F

BOE

or thirteen years the Financial Services Authority (FSA) has loomed large over the City of London, but it’s reign at the top is soon due to come to an end. The Chancellor, George Osborne, has announced that the FSA, the body that regulates the financial services industry, is to be broken up and its responsibilities reallocated. But is this simply a knee-jerk reaction to grab headlines and give the impression of progress or a genuine advancement? The current answer seems to be the former.

Since its inception in 1997 the FSA has formed a key part of the former Chancellor Gordon Brown’s vision for the City, under which the Tripartite Authorities of the Bank of England, HM Treasury and the FSA would split the responsibility for regulating financial services. Under the tripartite system, the FSA supervised the banks and was financial regulator, the Treasury was responsible for legislation and the Bank of England for financial stability. It seemed a sensible system which allocated responsibilities manageably between focused institutions.

The period that followed the creation of this system was latterly dubbed the “nice” decade by Governor of the Bank of England Mervyn King - here “nice” being used in the strictly acronymous and economic sense to stand for Non-Inflationary Consistently Expansionary. This meant that the first meaningful test of the system came in 2007 with the near collapse of Northern Rock and the rumblings of what would later snowball into the worldwide recession.

While it is widely accepted that no one predicted the “credit crunch” with any accuracy, many still tout the FSA’s failings as a key contributor to the way the City reacted to the disaster. George Osborne has been a major critic, largely blaming the FSA for failing to spot the approaching financial hurricane and the weakness of banks like Northern Rock. He also attacked the tripartite system in a keynote address saying, “no one knew who was in charge”. It is undeniable that many banks were under capitalised and that the FSA was not

strict enough before the crisis, but this appears to be a failing of the regulator, and not a failing of the framework that the regulator operates in.

The Conservative party had earmarked the FSA for abolition and talked of regulatory restructuring as early as 2009. George Osborne officially announced these plans in June of this year at a Mansion House speech. It represents a sweeping reform which transfers responsibility for preventing the build up of systematic risk in the economy, as well as oversight for individual banks, to the Bank of England and leaves Mervyn King as one of the most powerful central bankers in the world.

Mr. King has commented that his new role in enforcing financial stability is to “turn down the music when the dancing gets a little too wild”. This task will be added to the Banks current remit of controlling inflation.

The FSA will be broken up into a prudential regulator of banks and building societies, which will operate as a Bank of England subsidiary, and a Consumer Protection and Markets Authority (CPMA), responsible for policing the City and markets.

To the relief of many bankers and the markets the FSA’s chief executive Hans Sants has agreed to stay on for another three years despite previously indicating that he intended to quit. This should ease the transition to the new framework. Mr. Sants has reiterated the FSA’s commitment to certain policies and plans to ensure that these are adopted by the new bodies. These include a pledge to employ 400 more staff (a blessing to any students considering a graduate career in financial regulation) and a commitment to continue its “more intrusive” style of supervision which it has developed in the wake of the crisis.

Under the new system, Mr King, as chair of the new Financial Policy Committee and new Prudential Regulatory Authority, is being handed explicit powers to intervene and force firms to act if he believes there is a looming economic problem, such as another housing bubble.

As the Treasury will have the power to take complete control in a “crisis”, the Chancellor will retain the right to veto or overrule any decision taken by the Bank of England. This goes against the rest of the reform which generally sought to make it clear that the central bank and its governor, Mr King, would be in charge of supervising individual banks and the broader financial system.

Questions have also been raised concerning the new body, CPMA, which will focus on how banks, insurers and other financial institutions treat customers and manage their business as well as supervising markets to protect against abuse and ensure fair dealing. These two disparate activities are not seen as natural partners. Rob Moulton, a partner at the City law firm Nabarro said, “Putting markets alongside consumer protection feels like an afterthought” and this sentiment is reflective of the awkward combination that these two make.

The real issue is to coordinate regulators internationally and to instil a change in culture at the major regulators.

Only independent central banks have the broad macroeconomic understanding, the authority and the knowledge required to make the kind of macro-prudential judgments that are required now and in the future.

The fact remains that the FSA fell down on the job and is now being punished for its inability to carry out its remit fully. It seems like the Chancellor is taking the easy option (well, easier option) in abolishing the FSA; the real issue is to coordinate regulators internationally and to instil a change in culture at the major regulators. Through resigning the FSA to the scrap heap Mr Osborne is creating the impression of change and reform but it is not yet clear whether it will have a material effect or is just a smokescreen. So where is there left to go for the FSA? It would appear nowhere. The FSA has reached the end of the road and needs to make the most of the months it has left to repair its legacy.

Mr Osborne’s motivation for the shake-up is partially explained in the statement that, “only independent central banks have the broad macroeconomic understanding, the authority and the knowledge required to make the kind of macro-prudential judgments that are required now and in the future.”

To long time observers of the City this will seem an unusual development given that the last time the responsibility for banking supervision changed hands in 1997 it was from the Bank of England to the FSA. The Bank of England had lost credibility following several financial upsets, punctuated by the collapse of Barings Bank which was found to be under-capitalised given the risks taken by its derivatives arm in Singapore (see “Rogue Trader” for details!). This exemplifies the point that reshuffling the framework rarely changes the fundamental approach of the regulator, implying that it is only through a change in culture or legislation that real progress is made. Marching all of the FSA’s staff to a new building and giving them a new name is hardly a game changer.

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The organisers recognise that career decisions are difficult to make without prior exposure to the different positions within a bank. We believe that the intensive preparation and professional assessment participants go through over the course of this competition enables them to evaluate and develop their skill sets in preparation for a summer or graduate position, thereby facilitating more informed judgements with regards to their career paths.

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There will be ten teams of five competing.

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There will twenty teams of five competing.

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Prize:

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21

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If you are REALLY interested in

Economics, you may recognise this person....

It is; however, more likely that you will recognise

his book...

In this edition of the Equilibrium, The UCLU Economics and Finance Society is proud to present an exclusive interview with Tim Harford, author of the best seller :

the Undercover Economist.

Tim Harford will be speaking will be speaking at UCL later this year under the invitation of the UCLUEFS, so make sure you check out our Events Calendar located on the last 2 pages of this edition for more details.

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This autumn it is the EFS’ pleasure to welcome guest speaker Tim Harford.

T

By Michael Kelly

im Harford is a writer. In its various guises that can take the form of a journalist, author, columnist and even a presenter. Through his column “The Undercover Economist” he exposes the economics behind everyday incidents, and he does this so well that the column has been compiled in a book under that same name which has gone onto sell over one million copies worldwide and be translated into around 30 languages. Not bad for a first book.

His second book “The Logic of Life”, published in 2008, explores the idea of rationality. Although it seems that our everyday decisions do not follow any logic - such as a smoker having another cigarette, Tim argues that we are all surprisingly logical, from the casinos of Las Vegas to speed dating in Soho. Logic seems to apply to even the most illogical people such as racists, drug addicts and rats. This goes to the core of economic theory, so much of which depends on the assumption of rationality. The book was greeted

with great acclaim and went onto win the title of book of the year 2008 from both the Financial Times and The Economist.

Tim is certainly a fascinating economist, but an economist is probably the last person you would think of to go to for life advice. If you had trouble dating or struggled to grasp the intricacies of parenting most people would generally avoid a person to whom happiness is called utility and calculates the optimal amount of butter to put on their toast. But subverting our expectations in his agony aunt column “Dear Economist” in the Financial Times (FT), Tim offers advice to readers’ everyday problems using modern economic theory and brutal logic. While encompassing some elements of the traditional agony aunt persona this column is driven by logic and not emotion. If you are looking for a shoulder to cry on you are going to get a calculator instead. In his own words “When a dinner party guest wonders how much to spend on a bottle of wine, Dear Economist ignores the Good Wine Guide and reaches for the Journal of Wine Economics. “ Alongside being a much enjoyed column, Dear Economist, provides the basis of Tim’s third book, “Dear Undercover Economist”.

If you haven’t encountered these books before then don’t despair, there’s something for you here too. While some students focus on the “economics” element of being an “economics student” and know Tim well from avidly reading the FT (as many of us may have professed to do in our UCAS Personal Statements), others put the emphasis on the “student” part – a core component of which is watching television. To this section of our demographic Tim will be more readily recognisable as the lead role in the BBC television series “Trust Me, I’m an Economist”.

Before becoming a writer Tim was a tutor at Oxford and subsequently worked for Shell and the World Bank. This exemplifies the point that a career as an economist has the potential to be one of the most varied and interesting careers around.

Reading this book (The Undercover Economist) is like spending an ordinary day wearing X-ray goggles -David Bodanis

Lively and witty...After reading this book a trip to the supermarket is an entirely different experience -the Times

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EQ: Why do you call yourself The Undercover Economist?

enjoyed economics came as a complete surprise to me.

Because it’s the title of my first book, which was such an unexpected success. And I gave the book that title because in writing it, I had the idea in my mind that economists look like other people and do the same things that other people do, but they see things that other people don’t see. That was the idea. And of course, I thought it sounded a little bit cool, and a little bit cool is as cool as economics ever gets.

If there’s one book that inspired me it would be Dixit and Nalebuff’s “Thinking Strategically”. I’d list inspirational teachers but there were simply too many. I was very lucky.

EQ: Aside from writing and presenting on the radio/ tv, what is your biggest aspiration?

I would be quite happy if I was able to continue writing and presenting.

EQ: What did you want to be when you were younger?

I had the idea in my mind that economists look like other people and do the same things that other people do, but they see things that other people don’t see. That was the idea.

And of course, I thought it sounded a little bit cool, and a little bit cool is as cool as economics ever gets.

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I was always interested in writing and publishing as a boy. My mother was into computers, so I had a word processor in 1983 and a simple desktop publishing program in 1985. But at the time, it was all role-playing games and fantasy novels. No economics.

And somehow, by the time I became an economist I’d forgotten that I wanted to write. I wasn’t a student journalist, didn’t apply for jobs in journalism and didn’t regard myself as a strong writer.

EQ: What inspired you to pursue a career in economics?

That’s simple: the experience of studying economics. Like many people who didn’t know what they wanted to study, I applied for a degree in three subjects I’d never studied before: in my case, philosophy, politics and economics. I expected to like philosophy but the fact that I

EQ: What advice would you give a young economist looking to become an author?

Read a lot and write a lot. It’s all about informed practice.

EQ: Which aspect of economics do you find most interesting?

Originally, it was game theory, and I still love the subject. My thesis was about auctions.

More recently I’ve become very interested in behavioural economics, randomised field trials, and development economics in general. But the wonderful thing about my profession is that you get to keep sampling new ideas every week.

© UBS 2010. All rights reserved.

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PARENTS

buy into LOW PRICES

University accommodation: To buy or to rent?

R

eal estate agents have noticed a surge of parents buying properties for their children to live at university this summer. The implication of national austerity and the abolishment of home information packs since May combined with increasing rents all seem to have motivated parents into making this investment.

For a long time, parents would buy properties that fulfil their children’s minimum requirements while at university. But the property market’s roller coaster ride in recent years has made every market adjustment a worthwhile opportunity to invest.

This July saw a drop of 0.5% in the property market for the first time this year, according to Nationwide Building Society. But experts say that this is only the initial sign of a downward trend. Data compiled by the Royal Institution of Chartered Surveyors confirmed this trend. The RICS’ measure of demand for properties fell for the second month in a row, while the number of properties coming to the market increased to the highest since May 2007.

This drop does not only provide a good opportunity

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By Cecily Liu

to buy into low prices, however. Dramatic fluctuations since 2004 have created many opportunities for buyers to exit the housing market with a good profit. The shaky increase in average UK house price from £174,000 in 2004 to a peak of £188,000 in 2007 was followed by a sharp reduction after the financial crisis to a low of £150,000 in 2009 before the return in 2010. These changes have been much more unpredictable compared with the one way rise of property prices from £72,000 since 1996.

George Franks, sales director of Douglas & Gordon said that parents see the currently low house prices as a bargain and their budgets have increased significantly since the 90’s. “It’s not uncommon for a search to start from £1 million upwards,” he said, “All the normal rules apply: it should be centrally located, close to the tube or bus routes, be near a park and of course be close to shops, bars and restaurants.”

New-build flats in university cities of Leeds, Leicester and Birmingham have seen the biggest price reductions in July for the past two years, falling as much as 40 percent.

According to the RICS, London remains one of the two places to have an increase in July, although the percentage of

surveyors reporting a rise has dropped to 26%, from 43% in June. Furthermore, the steadily rising rent for students is also pressing for alternatives.

“London is filling up with parents from both the UK and overseas seeking student flats,” says David Adams of estate agency Chesterton Humberts. “Renting an apartment during university years is seen by many as dead money and insecure as there is little protection for tenants during the rental process.”

According to research by the website Accommodation for Students, average weekly rent has soared to £102.80 in London, while the nationwide average weekly rent reached £65 – up 4.3% from last year, which is more than double the increase seen over the previous two years.

Alarmingly, student numbers has doubled to 1.5 million in the past 20 years. But universities only provide 323,000 rooms, 21.5% of the total student demand, compared to the 44% of twenty years ago. David Gavaghan, who runs Quintain’s student accommodation fund, estimates that there is a shortage of about 300,000 beds in the UK. On the other hand, the limited ability for universities to provide additional accommodation means that private sector is stepping in to plug the gap. Unite, which operates about 40,000 rooms in 23 cities across the UK, charges weekly rents of £80 to £200. Private sector currently only supplies 124,000 houses, alerting large potential for profit in this market, but this also means that students will need to pay more.

One factor leading to the increased supply of properties is the public sector job cuts, causing many to sell their houses below asking price. This is particularly apparent in areas with a high concentration of public sector employees such as Aberystwyth, Rhyl and Morpeth in Northumberland, according to analysis by research group Hometrack.

Another factor is the abolishment of Home Information Packages as a legal requirement to market houses, hence reducing the cost for sellers. John Stevens, from the estate agent Stevens Associates commented: “Agreed sales are coming in at less than asking price again, with more properties on the market since HIPs has been scrapped.”

Silvana Rangel, a London student whose parents bought a £150,000 house for her in Shepherds Bush is one who benefited from the price swing. Her parents bought the house in December 2009, before the prices rose sharply in 2010.

Silvana said: “Given the low interest rate last year, it would have been useless to deposit the money in the bank.

The price reductions throughout 2009 allowed us to buy a nice house we otherwise could not afford. At that time we were told that our house would increase in value in 2010, which it surely did.”

With data released by Nationwide showing a drop in the average UK house from £170,111 in June to £169,347 in July, and forecast by the RICS that this downward trend will continue throughout 2010, it seems likely that soon more parents will be looking into this investment.

Another reason behind Silvana’s parents’ decision is the flexibility of choosing to either rent out the house if she leaves London after graduation or sell it directly, which has became much easier in recent years.

George Franks also commented on this recent phenomenon: “Historically, parents would take a long term view and retain the property as a rental investment. Today however, parents are more likely to sell soon after graduation so they are not burdened with being a landlord for too long.”

Robert Sturges, Director of the Chesterton Humberts Fulham offices, said that despite Fulham’s usual high demand, his offices have noticed a recent increase in enquiries as the new university year is about to begin. “Parents are attracted

to Fulham due to its relatively safe reputation, both physically and financially, and good connections to Central London and the West End. For most of the parental investors we come across, it is seen as an up-market area with prices that can be accessed by first time buyers.”

The UK property market has also attracted foreign students as that the pound’s appreciation against the dollar has reversed from its three month high of almost 1.60 at the beginning of August to 1.57 by the 18th.

David Adams said: “For overseas parents, buying a student property is also about a currency hedge and having part of their property portfolio invested in sterling, currently good value for those investing with dollar backed currencies, like the Chinese.”

However, despite the optimism, when and if the property market will pick up after this adjustment is itself a question. A gloomy forecast by the National Institute of Economic and Social Research in August suggested that the market is on a clear path down, and warned that house prices would fall by around 8% over the next five years, with inflation taken into account.

But at least here in London property prices will remain strong. Despite much of its property being already overvalued, London is nevertheless the home for the country’s financial sector and many high net worth individuals. The infrastructure projects of the Olympics, Stratford City and Crossrail will build a robust market for both its property and rental markets. Furthermore, its increasing student population is nowhere near reaching a plateau. So perhaps those parents who invest now do have a foresight after all.

21.5%

The percentage of accommodation universities can supply over total demand 2010

44%

The percentage of accommodation universities can supply over total demand 1990

EQUILIBRIUM

17

The Tale of

a Dragon &

an Elephant

By Swamit Mehta

The rise of China and India has attracted much international discussion in recent years. Using the analogy of a dragon and an elephant, Swamit Mehta offers an analysis of recent events from the two countries gives his interpretations.

If you’re wondering what the link between a dragon, an elephant and economics is, I assure you that what I am about to tell is not another old folk tale, but instead a reality check for all of us in the western world. I am referring to China as the dragon and to India as the elephant. Even the most oblivious individual need not be told that there is a seismic shift taking place in the global economy, in which, whilst China is well on its way to becoming the world’s factory, India is slowly and steadily claiming the lion’s share of the world’s service sector. No self-respecting western politician can now choose to ignore these two countries whilst talking about the global economy. Indeed, the Prime Minister, Mr. Cameron, decided to make a trip to India accompanied by a large party of senior politicians, diplomats and businessmen in order to woo the rinsing giant. As the World Bank pointed out, the economic rise of these countries has been the single most important factor in reducing global poverty over the past two decades. This is all very well, but it surely raises fundamental questions about the structure of the world economy and the balance of global geopolitical power. This therefore, indeed, makes it a tale to be told.

I refer to China as the dragon, not only because of the traditional imagery associated with the mythical animal but also in order to stress on the rapid way it has developed economically. Ever since, Deng Xiaoping, the architect of the Chinese economic renaissance, led a wave of liberate economic reformations, its growth has literally been unstoppable. It is now perceived more as an economic threat or even a land of opportunities by the west (rather than an isolated pariah state –as it was in the middle of the 20th Century). This is mainly because its economy has become too large and influential to ignore. The country’s economic growth rate – averaging 9.5 percent a year in real terms - is simply phenomenal and has made foreign investors lick their lips with glee.

The country’s (China’s) economic growth rate – averaging 9.5 percent a year in real terms - is simply phenomenal and has made foreign investors lick their lips with glee. On the other hand, Indians quite like the idea of their country as a lumbering elephant thereby placing great belief on the old adage “slow and steady wins the race”.

On the other hand, Indians quite like the idea of their country as a lumbering elephant thereby placing great belief on the old adage “slow and steady wins the race”. The great Indian growth story started in the early 1990s when the current Prime Minister Dr. Manmohan Singh (then the Finance Minister) unleashed a number of liberalisation policies that enabled India to break away from the shackles of heavy regulation and protectionism. This led to an annual growth rate of 6% and allowed India to advertise itself as ‘the world’s fastest growing free market democracy’ at the World Economic Forum, at Davos, in 2006. Needless to say, this tag caught on and a large amount of foreign direct investment followed. India has since been growing at the rate of 9% a year.

But the dragon and the elephant are two competing giants. Whilst Indian government ministers can often be heard insisting that there is no race between the two countries they lose no time in pointing out every occasion that India appears to be doing better. That is perhaps inevitable for a country that is playing catch-up. China, on the other hand, pays rather less attention to India. We may well be witnessing a ‘great race’ between these two countries (and their corresponding ideologies) – and there can only be one winner. Whilst China is a centrally planned economy controlled by the Communist Party and exerts great influence on the socio-economic lives of its citizens, India can easily be described best as a “functioning anarchy”.

If these two countries eventually become as prosperous as ‘the west’ – their corresponding ideologies shall become a perfect recipe for development for a number of other African and Asian countries. China’s critics firmly believe that the Communist Party is sitting on a powder keg of unrest that will one day explode, with disastrous consequences. Indeed, organisations like Amnesty International often accuse China’s “repressive regime” of exploiting human rights. India on the other hand has a better story to tell on human rights but at the same time is plagued by communal tensions that can be quite disastrous.

However, many prominent economists point out that the Indian laissez-faire attitude and its army of homegrown entrepreneurs may give it a long-term advantage over a China that is hamstrung by inefficient banks and capital markets. So, whilst India has a superior ‘soft’ infrastructure and a more advanced legal system, which allows its capital markets to operate with greater efficiency and transparency, its development is often hindered by poor physical infrastructure. China, on the other hand, boasts a wide network of roads and railway, large and efficient ports and modern airports – that further stimulate economic development. India is also a less open economy, with tariff levels more than twice as high as China, rigid employment regulations and widespread corruption. Thus it was not surprising to see that the World Competitiveness Scoreboard

put China in 19th Place and India in the 29th. But both of these countries face severe demographic problems. Many fear that China’s one-child policy will make the country grow old before it becomes rich. By 2015, China is predicted to have a declining population that is of working-age, a serious problem for a country with little state welfare and pension systems. India on the other hand, still has a high birth rate but its rapid population growth may lead to high youth young unemployment - the Indian Labour Report 2006 predicts that there would be 211 million unemployed by 2020.

Despite these drawbacks, the dragon and the elephant provoke fear and uncertainty in equal measures.

They will lead a new world order.

Despite these drawbacks, the dragon and the elephant provoke fear and uncertainty in equal measures. They will lead a new world order. Even though their per capita income levels are lower than developed countries, their large GDPs means that they are together the biggest threat to the world economy. A World Bank study called Dancing with Giants, published in 2006, drew on Angus Maddison’s historical data and proved that neither America nor Britain had administered as large a shock to the world economy as China.

At the same time, they shall consume large quantities of the world’s resources – thereby placing immense pressure on commodity prices. The International Energy Agency predicts a doomsday scenario, saying that worldwide demand of oil will outstrip its supply predominantly because of China and India’s demand. Economic power and political influence also go hand in hand with each other. We should all be ready for those countries to flex their diplomatic and military muscles in the global environment.

Economics, like all social sciences, is one large experiment. No one is certain what the world will look like 50 years down the line. Will these two giants co-exist together?

How will the world cope with the emergence of two new superpowers? These questions can be thought-provoking if not frightening. Individuals in the western world should be concerned about how these eastern countries will affect their daily lives. Whilst some in Europe and America will look at the rise of these countries with starry eyes – hoping to take advantage of larger, more prosperous markets, others shall be intimidated by the rise of the dragon and the elephant.

The dragon and the elephant are indeed hungry – and they are hungry for more.

EQUILIBRIUM

19

EFS ANNUAL

February 2nd 2010 marked the start of the first annual UCL Economics Conference, which gathered renowned policy makers, academics and professionals in a discussion of the global economic challenges we face today. Last year’s UCL Economics and Finance Society Economics VP, Mohamed Ridha, with the help of the Economics Department organized the event to create an opportunity for UCL students to interact and gain exposure to some of the brightest minds and decision makers in economics.

The guest speaker list included chief economists from firms such as Deutsche Bank, BNP Paribas and Standard & Poor’s, as well as renowned academics such as Andrew Scott, Chair of economics at London Business School. The topics on the agenda ranged from government bailouts and budget deficits, to Keynesian economics and the evolution of capitalism. The lectures were heavy with economics; however the clarity and rhetoric of the speakers ensured that almost everyone could understand the complex topics given some background economics knowledge and awareness of current affairs. The discussions that followed shed light to different perspectives and gave a chance for the audience to ask questions to clarify and raise questions.

ECONOMICS CONFERENCE The following conference will broach subjects from across the economic spectrum. For more information, visit uclefs.com or follow the EFS on Facebook.

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