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ISSUE 15 FEBRUARY 2015

Where do we go from here?

INSIDE INSIDE THIS THIS ISSUE ISSUE

Charles Clarke, Ian Stewart & David Smith

Income Inequality in the Twenty-First Century

How Oil Makes Women Worse Off


Letters

The Nottingham Economic Review

Foreword As I write this foreward, there are many uncertainties in the world around us: the future for Greece under its new government and the impact on the Eurozone; the decline in the price of oil – great for consumers, less so for producers and exporters; the political arguing in the UK around austerity or support for the NHS; the discussions around TTIP (Transatlantic Trade and Investment Partnership) between the EU and US; the apparent inequality in the distribution of wealth both globally and within countries; and as we come out of the warmest year in history, continuing debate over climate change and global warming. The real joy of being an economist is that we can use our analytical eye to explore all these a myriad of other problems that face the global economy now and in the future. To that end, students within the School of Economics have always been keen to apply their learning, knowledge and interests to a plethora of fascinating topics and the Nottingham Economic Review continues to be an excellent channel for sharing these thoughts. The quality of the thinking, the writing and indeed the sheer energy in researching these pieces has been a hallmark of the NER since its inception. I am delighted that it continues to offer this opportunity and equally I am very pleased again to offer my support to this latest edition. What I hope is that the readers of the NER will gain insight into areas of topical concern in a written style that is informative and communicates economic analysis in an appealing and intuitive fashion. I hope too that it prompts the reader to think further about these subjects, to find out more through research and indeed most importantly to be inspired to write their own article for the next edition. I sincerely hope this is the case but whatever your motivation for reading, I hope you enjoy it and will come back for more in future editions. Incidentally, those of you who are loyal readers will appreciate that this is possibly the first time in ages I haven’t mentioned my own research interest in food and food prices. For that you may be grateful, but who knows, maybe next time there might just be some food for thought from me! Professor Wyn Morgan Assistant Pro-Vice-Chancellor for Teaching and Learning & Professor of Economics

Congratulations to our February 2015 Prize Winners Gainsborough Prize Winner: Saurabh Tripathi - An Analysis of Income Inequality in the Twenty-First Century Gainsborough Prize Runner-up: Qureysh Yunus - The Curse of the Black Gold: How oil makes women worse off

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The Nottingham Economic Review

Letters

Dear Readers, On behalf of The NER team, it is our pleasure to present you the 15th issue of The Nottingham Economic Review. Now in its 8th year, and building on the continued success of previous issues, The NER offers students from Nottingham and other universities around the world a platform to engage with a range of current economic and political themes. This year, a broad range of external submissions is complemented by a contribution from every member of the editorial team. 2015 will be an exciting year for politics, and with this in mind we’ve introduced a new ‘debate’ section, with this issue focussing on decreasing student faith in the mainstream parties. Features on the NHS crisis, government corruption and the effectiveness of foreign aid demonstrate a move towards addressing issues at the forefront of politics within this issue. With an economics focus, we include contributions that consider behavioural economics such as “Tipped Off”, and those that are concerned with competition theory, like “The Broadcasters Derby”. We continue to extend our interviews section. This issue includes a conversation withProfessor Daniele Nosenzo, who discusses the work carried out by The Centre for Decision Research and Experimental Economics (CeDEx). Additionally, Economics Editor of The Sunday Times David Smith, ex-Home Secretary Charles Clarke and Ian Stewart, Chief Economist at Deloitte, provide an insight into the UK economy, as well as sharing with us their expectations for the forthcoming general election. We would like to express our gratitude for those that have made this edition, and indeed those that precede it, possible. The School of Economics continues to be of vital support to The NER, and as such we would like to thank all those in the department with special mention to Kevin Lee, Sue Berry, Janet Lewis, Oliver Morrissey and Wyn Morgan. Without Philip Watson, a Nottingham Alumni, The NER would fail to exist in its current form and to this end the team extends thanks for his continued support. Special mention must be made to Jason Sayer as head of design and production, to our team of Associate Editors for all their hard work, and to Dom Moir as Finance Director, all of whom continue to make the magazine what it is today. It is their enthusiasm, talent and dedication to The NER that has made working with them such a great pleasure. Finally, we would like to thank all those who have taken the time to contribute to The NER.

James Longman, Hannh Kirby, Ben Hodges

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The NER Team

The Nottingham Economic Review

The NER Team About us: The Nottingham Economic Review is a student run bi-annual journal whose purpose is to showcase undergraduate research and promote ongoing advancements in economic thought. Every semester we gather submissions and publish those who we believe contain the most thought provoking, insightful arguments while simultaneously capturing the interest of our readers. We also publish a section dedicated to features and editorials concerning current affairs alongside interviews and Q&A sessions. Co-Editors in Chief Ben Hodges Hannah Kirby James Longman

Special Thanks to Philip Watson Hilary Clayton Sue Berry Louise Hemming Prof. Wyn Morgan Prof. Oliver Morrissey Charles Gedeon

Associate Editors Adam Williams Ashita Gagliani Apoorva Bihani Diana Beltekian Oluyinka Olutola Sophy Rolson Steven Thavendran

Contact: General: team@neronline.co.uk Advertising: team@neronline.co.uk Submissions: team@neronline.co.uk Website: neronline.co.uk

Finance and Marketing Manager Dominic Moir

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Contents

Contents 02 Foreword and Prize Winners 03 Editorial 04 The NER Team 05 Contents 06

[Interview] A Conversation with Charles Clarke - Longman, Hodges, Rolson

Features 07 Graft & Growth: How Corruption is Affecting India - Bihani 09 Geneva Report - The Conflict of Deleveraging - Gagliani 11 BT vs Sky - The Broadcasters Derby - Williams 13

[Insight] CeDEx Insight: Daniele Nosenzo - Olutola

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Should the Western Powers Continue to Give Foreign Aid to Less Developed Economies - Thavendran Can We Save the Culture of Banking? - Kirby The Point of Sufficiency: An Analysis of the Limits to Economic Growth - Martin NHS in crisis: Where do We Go From Here? - Rolson

Debate 22 Election Special: Have the Mainstream Political Parties Lost the Student Vote? - Williams & Thavendran Research & Competition Candiates 24 An Analysis of Income Inequality in the Twenty-First Century (Gainsborough Prize Winner) - Tripathi 27 The Curse of the Black Gold: How oil makes women worse off Gainsborough Prize Runner Up) - Yunus 28 Producers, Politicians, Warriors, and Forecasters: Who’s Who in the Oil Market? - Medel 31

[Interview] A Conversation with David Smith - Hodges & Moir

Features 32 Why the Bank of England is Right to be Pessimistic About the UK Economy - Olutola 33 Why Should Economic Courses be Redefined and How Austrians May Help - Urban 37 Japan: From 1964 to 2020 - Beltekian 40 Rethinking the Command Economy - Amin 41 Tipped off - Hodges 43

[Interview] A Conversation with Ian Stewart - Longman & Bihani

Bibliography 45 Images used

Prize Competition Former Alumnus Philip Watson is offering a £100 prize to all our readers who can solve this problem. The semi-mathematical problem requires “De Bono” thinking. Drilling a cube: A cube of 1 unit side is drilled through from all three sides with a drill size of 1 unit in diameter. What is the volume of one of the eight corner pieces that remain? There is a solution available if required. The prize will be given to the first timed and dated by email that is correct. Please email the answers to team@neronline.co.uk

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Interview

The Nottingham Economic Review

A Conversation with Charles Clarke Former Home Secretary for the Labour Party

Interviewed by James Longman, Ben Hodges & Sophy Rolson (BSc Economics, ‘15 & ‘17, The University of Nottingham)

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.harles Clarke is a former Labour Party politician. He has held various positions over his time in office, including Minister of State, Secretary of State for Education and Skills, and ultimately Home Secretary in 2004. In 2006 he retired from the Home Office and is now Visiting Professor to the School of Political, Social and International Studies at the University of East Anglia. Charles recently published a book entitled ‘The Too Difficult Box: The Big Issues Politicians Can’t Crack,’ which brings together a host of politicians, academics, and public servants to confront some of the largest issues facing our society today. He visited the University of Nottingham in October 2014 to give a talk on contemporary international economic and security challenges. Can you tell us why you chose the topic of global security for your talk today? Because we live in an increasingly globalised world. Your generation is growing up in a world which is far more globally interdependent than was the case when I was your age. Do we have international institutions which have the capacity to deal with the issues? Classic example: the 2008 crash was to a large extent the failure of international regulation of our monetary systems, and it applies in lots of other areas. How do we create international government which can deal with all of our issues? Or do we follow the UKIP example and say we can sort it all out without worrying about international relations at all? I honestly don’t think so, but that challenge of how you build the international capacity to govern in a fair way is very tough. We wanted to ask you about the ongoing issue in Britain at the moment with British citizens who are travelling to Syria, supposedly fighting for ISIS and then returning to Britain. Theresa May has been quite vocal in arguing that the

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state should come down hard. Is there a debate to be had as to whether we should be compassionate? There is a debate to be had, and all forms of criminality, in my opinion, have to be dealt with in a hard way. However, then you have a question of how to define criminality. Is the crime being committed against British citizens or against humanity? From the information I have, the people who have gone to fight with ISIS are committing crimes at least against humanity and possibly against British citizens, and so it seems entirely reasonable that you have tough measures to deal with

parties should be focussing on in the run up to the 2015 election? Undoubtedly the most important security issue facing the world at the moment is all the issues around ISIS, Iraq, Afghanistan, Syria, and the Middle East. There have been many cases in my lifetime where terrible situations have made progress. The one area we have made no progress whatsoever in is the Middle East and all the issues that have arisen from there. That is the single most important issue, and for me, it’s also the most depressing issue because I don’t see any real clarity about how the world is going to try and address these problems. What I’m certain is you can’t turn your back on it. You cannot simply say ‘this is going to go away’. It’s not going to go away. It’s going to be there, and we have to decide what we can do. My own argument is that we have to work with Russia and Iran and so on to address many of these issues, and some of the cohort situations don’t work. I also think we’ve got to be very firm in relation to Russia and Ukraine, but if you ask me the most important issues are definitely ISIS and the Middle East.

them. But you’ve got to be careful and clear that these individuals are actually committing crimes. It can’t be a crime just to go to Syria. It’s a question of what you’re doing when you’re there. I think the idea that you can stop everybody who’s been born and brought up in Britain from travelling internationally, and if we stop that we stop the problems, is a foolish way of looking at it. It’s not just Syria; there have been many issues with people travelling to Pakistan and then coming back here and committing crimes against people here. The idea that the border is the key question is wrong in my opinion. The crime is the key question – i.e. what crime are they actually committing – and that’s what you’ve really got to get to. What are the main security issues that the

Members of ISIS have been using social media as a tool to contact people around the world, and it’s often young, impressionable people that are seeing this content online. What do you think the role of social media is in resolving international conflict? Excellent question. Firstly, I don’t think you can control it. I was talking to a student at the University of East Anglia where I was Visiting Professor last week. He’d come to do an MA from Rwanda, and his MA is into radio because in Rwanda when the genocide took place in 1994 the radio was used as a means of urging and inciting people to kill their neighbours. The result was that a million people died. Now social media can play that kind of role, but I think the idea that government can stop that and somehow prevent it is completely wrong.


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I think one would be trying to put a genie back in the bottle which can’t be put back in the bottle by saying that somehow social media can be controlled. I think it’s a question of ourselves being at least as sophisticated in trying to ensure that we communicate as effectively as possible, and I don’t think we always have been. Your generation uses social media far more than my generation does – do we know how to communicate with your generation about these questions in that kind of way? I don’t think we do, and so we have to try and do that. So yes, I do think social media is very important. Do I believe that it can be stopped, can be put back in the bottle? No, and therefore what I would say is we have to be effective ourselves in making those communication efforts. At the end of the day it’s the message not the messenger which is the key thing, and we have to address those messages as strongly and clearly as we can. I suppose the final thing to say is the more young people are resilient and self confident and strong in themselves, the less significant is the social media which motivates them, and that’s the call for a lot of work I do for increased levels of education in the Arab world but also more widely. The better educated, more self-confident, and stronger people are, then the less they are susceptible to propaganda through social media and any other form. Arguably, the world is a far more dangerous place now than it was twenty or thirty years ago. Countries that were once easily accessible and safe to visit are now very dangerous. Given that we

Interview

are geographically far from many of these countries, how concerned should we be? Steven Pinker, a professor at Harvard a couple of years ago, wrote a very interesting book. It said that the nature of warfare and the nature of conflict had in fact reduced over time rather than increased, partly because the conflicts that are taking place now are much more low key and involve fewer fatalities than things like the Great War or the Vietnam War. There’s been a massive progress, but there’s still an immense number of issues which still remain and have to be resolved. Again, trying to put it back in the box and say we can just ignore the impact of these things on us is simply not right. Even in 1938 we couldn’t do it. We couldn’t stop what was happening in central Europe impacting on our lives very directly, and I think it’s a complete illusion to believe that these events can take place in ways that don’t affect us at all. The truth is, in our lifetimes we’ve had a complete transformation in communications, technology, and economic relationships. Decisions being taken over there are having a big impact elsewhere, and you just can’t get away from it. The ‘stop the train I want to get off’ line, which I think is what motivates the body of opinion who support UKIP, are people who think somehow you can get away from what’s going on in the rest of the world and we can live our life as we always did. That’s not the story. The story is the world is changing faster and faster. Whether that’s a good thing or a bad thing depends on what we do with the change: whether we try and control it, or simply say ‘there’s nothing we can do so let’s wait and see what happens’.

But the idea that we can just go back and recreate 1955 is a complete illusion. Do you think globalisation has improved global security, or do you think that it’s actually enabled us to have bigger threats? I don’t like looking at the black and white question yes or no, because obviously globalisation brought massive advances for people but it’s also brought massive negative consequences to people in different ways, so there’s a balance between them. I suppose at the end of the day I think it’s increased our security because we have greater knowledge of what’s going on in the world. Tyrannies like the Soviet Empire can’t exist in the same kind of way because of globalisation. Countries like China, which also have that tyrannical history, are much more susceptible to people knowing what’s going on in the world than was the case in the past. At the end of the day, apartheid fell because of the globalisation process. So I suppose by bottom line is that globalisation is positive rather than negative for security, but I can’t deny there’s been major aspects of globalisation that have been very negative for particular communities. For example, in the North East of England the mines, the coal fields, the steel works, the ship building, and so on, have all been decimated as a result of globalisation. Communities have been left behind. You have to acknowledge that’s been a very negative thing. The NER would like to thank Charles Clarke for his time and effort in participating in this interview.

Graft & Growth: How Corruption is Affecting India Apoorva Bihani (BSc Economics ‘16, The University of Nottingham)

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..ndia has seen years of high economic growth in the past decade, with an increase in output, GDP per capita and FDI, amongst other indicators. Most people belonging to middle and high-income groups living in urban India now enjoy the benefits of greater government spending and investment in terms of better infrastructure,

public goods along with improvement in the retail industry. However, this has not been the only development of recent time. The past few years have seen the unmasking of several scams, accompanied by public outrage. Over US$100 billion were lost in large scale swindling scams, with the most notable being the Coal Allocation scam (US$

30 billion), 2G Spectrum Scam (US$29 billion) and Commonwealth Games scam (US$ 11 billion). Grafts remain the norm in government offices and police stations to get any official paperwork done. Endemic corruption is now testing the common man’s patience, best exhibited in the Anti-Corruption Movement of 2011 led by social activist Anna Hazare.

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Although corruption is not a new phenomenon for India, today it is causing frustration amongst the citizens who expect better allocation of resources and public funds in this emerging economy. It is also threatening growth by upsetting investors, widening the income and wealth inequality and acting as hindrance to poverty reduction. Roots of rampant corruption can be traced back to the rules and regulations of the newly independent India in 1947, under the first prime minister, Jawaharlal Nehru. Nehru’s idea of running the economy was in a controlled and closed manner, with the public sector dominating most major industries for the first few decades. The government regulated the private sector by introducing several permit and license requirements to set up a private business. Up to 80 government agencies had to be taken approval of before getting a business up and running legally. This ‘License Raj’ thus acted as a significant barrier for new and private firms. Such a setting paved the way for bureaucratic corruption, with bribes being handed out to poorly paid government officials in exchange for licenses and permits. Poorly paid civil servants were also part of the cause, and they began to abuse their power to earn bribes, which became a part of their salary structure. Moreover, Nehru’s tax policy added fuel to the fire by demanding enormous proportions of income for tax. The highest earners were expected to pay 93.5% of their earnings in tax by the 1970s. For law-abiding citizens, this meant having to pay large sums of earnings to the government, without having to enjoy immediate benefits from it; this would not only discourage them from working hard, but also make survival tougher if tax was paid legally. Thus, increasing number of citizens chose not to do so, and corruption through tax evasion became habitual. The economic reforms of 1991 ended India’s period of a closed economy, making it much more market oriented. Private and foreign investment was encouraged, with deregulation of markets along with a fall in tariffs and taxes. The ‘License Raj’ was brought to an end, but this only solved part of the problem as far as corruption was concerned. Several intermediaries disappeared and tax rates reduced, but bribery and tax evasion continued, because such corrupt behavior had already spread to other public sectors such as police and judiciary. This continues to cause problems for the ordinary citizen, as

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most government officials tend to abuse their power to earn bribes. Basic services such as getting a police complaint filed, registering for an electricity connection, or even getting a driver’s license, is hard to complete without having to pay ‘gratuity’ to the bureaucrats. This may not pose a big problem for a richer segment of the society, but the poor and middle class shall suffer. A study conducted by the Centre for Media Studies in 2012 has found that nearly 35% of slum dwellers were denied a basic civil service at least once a day because they couldn’t afford to pay the bribe. The poor cannot expect to be uplifted from their low standard of living if paying for basic services begins to compete with their ability to survive. The tax paying middle class are likely to be more frustrated because they aren’t provided with the services they pay for. Due to corruption at such petty levels, the ordinary Indian is losing money, and gaining unsatisfactory returns.

“only 40% grain handed out to the poor reaches the intended targets.” Unfortunately, corruption in India isn’t just limited to petty bribes. There exists a massive underground economy of black money coming from tax evasion and illegal activities. A report from US-based group Global Financial Integrity in 2010 has found a loss of US$462 billion in illicit capital flows since 1948, a year after the country’s independence. The biggest scams have involved ministers and other government officials looting hundreds of billions of rupees. Widespread corruption poses a large threat to the economy by causing misallocation of resources. The Indian Coal Allocation Scam for example, lost US$30 billion of revenue because allocation of coal blocks to private and public sector enterprises wasn’t done through the legal process of competitive bidding. India’s economic growth has been rising over the past decade. Yet is this sustainable with such high levels of corruption? If nothing changes, several aspects of ‘growth’ such as poverty, rural development and income inequality, may not be addressed. The Indian government spends nearly 2% of its GDP on poverty alleviation schemes, but there

seems to be little guarantee of fair execution. A report by World Bank mentions that only 40% grain handed out to the poor reaches the intended targets. As long as politics remains contaminated by corruption, efficient implementation of poverty reduction programs is doubtful. Nearly 77% of the poor in India live in rural areas with weak infrastructure, and low education and job opportunities; it is always easier to win the votes of the poor, and those in political power will continue to take advantage of this. Apart from poverty, corruption also threatens investment. As an emerging economy, India is a popular choice for foreign direct investment and has been seeing an increasing rate of FDI inflows since the 1991 reforms. Investors look for transparency, ease of operations, and security of returns in a new market, while endemic corruption may challenge all of them. India’s bureaucratic system also causes trouble for foreign firms looking to invest in India. Private investors encountering similar troubles seem to have lowered investment, as private investment in 2011 fell from 17% to 11% of GDP, negatively affecting output. Petty corruption at bureaucratic levels and unveiling of large-scale fraudulent scams can drive away foreign as well as private investors. India is a young country that offers plenty of potential with a large manufacturing sector, flourishing IT and pharmaceutical industries, and high growth prospects. But to maximize its potential and for these effects to trickle down to the rural areas where 70% of Indians live, eliminating corruption is essential. As long as bribing officers for documentation and licenses continues, businessmen and investors will be apprehensive to operate in the country. Citizens need to be encouraged to rebuild trust in the political system, if the government hopes to receive all the tax it demands. If vast amounts of public funds are seen being swindled away by officials and ministers, the ordinary citizens are gradually going to lose all faith in the government. Narendra Modi, the new prime minister elected in May 2014, seems keen on increasing transparency, encouraging business and increasing manufacturing. If his promises are to be fulfilled, corruption will hopefully see in a decline over the next few years and India should be better able to exploit its potential. References Anon., 2014. Fighting corruption in India: A bad boom [Online] (Updated 15 Mar 2014) http://www. economist.com/news/briefing/21598967-graft-india-


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damaging-economy-country-needs-get-seriousabout-dealing-it [Accessed 03 Dec 2014]

problem-black-money-india-evasive-action [Accessed 27th Nov 2014]

Anon., 2014. Reviving India’s economy: Modi’s Mission [Online] (Updated 24 May 2014) http:// www.economist.com/news/briefing/21602709-newprime-minister-has-good-chance-resuscitatingcountrys-underperforming [Accessed 02 Dec 2014]

Anon., 2010. India lost $462 bn in illegal capital flows, says report [Online] (Updated 18 Nov 2010) http:// www.bbc.co.uk/news/world-south-asia-11782795 [Accessed 25 Nov 2014]

Anon., 2013. India’s shadow economy: Evasive Action [Online] (Updated 23 Mar 2013) http:// w w w. e c o n o m i s t . c o m / n e w s / f i n a n c e - a n d economics/21573979-banking-scandal-highlights-

Paskal, C., 2011. Roots of corruption in India [Online] (Updated 11 Feb 2012) http://www.huffingtonpost. com/cleo-paskal/corruption-in-india_b_1065822. html [Accessed 26 Nov 2014]

Anon., 2012. Common man feels corruption has increased: Study [Online] (Updated 07 Dec 2012) http://timesofindia.indiatimes.com/india/Commonman-feels-corruption-has-increased-Study/ articleshow/17519650.cms [Accessed 25 Nov 2014] Mendiolaza, G., 2012. India: Corruption Affecting Investment and Growth [Online] (Updated 12 December 2012) Available at: http://www. futuredirections.org.au/publications/indianocean/29-indian-ocean-swa/848-india-corruptionaffecting-investment-and-economic-growth.html [Accessed 02 Dec 2014]

Geneva Report - The Conflict of Deleveraging Ashita Gaglani (BSc Economics ‘16, The University of Nottingham)

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.he recent release of the Geneva Report, published jointly by the CEPR & ICMB, dictate the general consensus that the global economy may be heading towards a future crisis. The combination of record debt and slow growth continue to weaken the global recovery from its progress of repair. The conflict of deleveraging was provoked by the global debt-to-GDP ratio which continues to rise, despite slower nominal growth complicating the deleveraging process and exhausting the potential for recovery. The Global Economic Leverage The complexities of leveraging have increased post financial crisis, with excess levels of debt being used to initiate growth yet substantially increasing the risks for that economy in question, adding to the fragility of the global economy. The way in which financial instruments are utilised to increase the potential return of an investment will determine the degree of vulnerability to funding shocks. The leverage of financial-sector entities in aggregate will help determine the level of external debt and its impact on macroeconomic growth. The stock of debt is more threatening in the presence of a thin layer of equity liabilities which provide a weaker buffer to losses. In terms of the asset side, debt that is backed with liquid assets of stable returns poses a weaker issue. The financial crisis of 2008

accumulated a wave of external debt that was experienced mainly by the US & the Eurozone however, the double-dip in 2011 that seems to have only just ended, has caused emerging markets to be the latest victims of slowing growth.

“The euro periphery is where this perverse loop of debt and growth is most severe” With the world economy continuing to leverage up, the aim for a process of global deleveraging to reduce the total debt-toGDP ratio has halted before it can even start. However, both the US and the UK have begun their process of deleveraging, but at the cost of an increase in government sector debt. Until 2008, developed markets led the process of leveraging, yet emerging markets such as China are now following the same path potentially risking their economy to be the centre of future crisis. Albeit the accumulation of leveraging in developed markets is higher which has accelerated post-crisis years; the speed of recent leveraging in emerging economies is of increasing concern.

Debt Dynamics & The Potential of a Future Crisis The role of debt dynamics in the global economy are pivotal in determining the potential of a future crisis. The Geneva report’s ratio of global total debt excluding financials states a continued increase of 38 percentage points since 2008, reaching a new high of 212%. Since the financial crisis, structural breaks have been present in the majority of Eurozone countries with debt dynamics differing due to the different bailouts. With the US, UK & the Eurozone having similar ratios of debt ex-financials, Japan stands as an outlier with a total debt of 562% and debt ex-financials of 411% of GDP2. ‘The euro periphery is where this perverse loop of debt and growth is most severe’. The increase in global leverage is due to both public and private debt components. Albeit, the UK & the US have started deleveraging in the private sector, the speed of progress is incredibly slow - leaving the ratio elevated. Interestingly, to contribute its part in preventing a potential future crisis, the ratio of debt-toGDP in the US has been at its lowest level since the beginning of the new millennium, but is sadly unaccompanied by the UK, with leverage of their financial sector remaining very high. Exposing the issue of rising leverage to be more threatening is the combination of slow

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nominal growth faced by the global economy. The global economy is stuck in a vicious loop where it is continuously attempting to deleverage through policy attempts, but the effort is weakened by slower nominal growth. This increases the complexities of deleveraging and sparks fear of another crisis; perhaps most likely to originate in emerging economies such as China. Relative to when the bulk of debt was assumed, developed and emerging economies have experienced a fall in potential output that causes an increasing concern in debt sustainability. Emerging Economies The response of several emerging economies to the global financial crisis was a simultaneous decision to divert their attention to domestically-led growth rather than exportled growth that was fuelled by an expansion in domestic credit, in particular by China. The Geneva Report claims that China is the next victim to face a debt crisis if the country’s policy-makers continue to leverage up the economy to maintain growth at artificially high levels. The inefficient allocation of resources contributed largely to the accumulation of leverage. China fuelled its real growth rate at the end of 2001 when it gained accession to the WTO, leading to growth rates being of double digits by 2007 however, growth started to fade once the accumulating debt crisis in 2008 wounded Chinese exports. Since 2008, China has estimated its total debt (ex-financials) to be of 72%, a figure almost double of which the US and the UK had in the first six years postfinancial crisis. Hence, China is the largest victim in the global economy to face a vicious combination of fast-growing leverage and slowing nominal GDP, (shown in Figure 4.27) furthering the probability that the Chinese economy may be heading towards a future crisis. In terms of forecasting the future of China’s economy - the majority of the country’s debt is domestic, similar to Japan. The Chinese economy has the ability to contain systemic risk through its current resources, the report predicts that the country is likely to experience a depreciation in their currency combined with inflationary pressures that will be shifted to foreign investors to adjust. Progress of Repair Whilst accumulation of debt in advanced economies has now gone beyond their capacity to handle it, emerging markets

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are following suit through showing signs of vulnerability. To prevent a furthering of excessive debt, policy-makers should aim to make immediate adjustments. However, the Geneva report concludes through numerous case-studies that different policy changes ‘point to difficult trade-offs between further debt accumulation to prevent stagnation of the real economy and debt consolidation at the cost of stagnation’.

“China has estimated its total debt (ex-financials) to be of 72%, a figure almost double of which the US and the UK had in the first six years postfinancial crisis” Financial regulation that aims to increase the resilience of the financial sector is key to preventing excessive debt from accumulating. This includes appropriate capitalisation levels for distressed banks, efficient liquidity provision by monetary authorities as well as a mechanism for debt restructuring. A weak public sector balance sheet will also flaw the country’s ability to withstand shocks. China for instance, although is falling short in other sectors in terms of performance, its low level of central government leverage is a component of stability for its economy. Macro-prudential regulation has become a new focus post-crisis since the tools of banking regulation and fiscal discipline were concluded as insufficient tools to prevent a crisis whilst ensuring that fiscal policy is run in a countercyclical manner remains of high priority. In order for the deleveraging process to work smoothly, it’s ideal for supportive monetary policies to be implemented in order to allow credit to flow again. With interest rates being at incredibly low levels, investors are incentivised to seek for higher yields and take excessive risk, concluding that current financial regulations are not strong enough to prevent leverage

accumulation. Expansionary monetary policies are vital to boost growth however, as it raises the risk of bubbles rising. Hence, expanding policy instruments may be an option if paired with appropriate structural policies. In addition, fiscal improvement rather than fiscal expansion is necessary. For instance, the new fiscal framework for the Eurozone is supporting its economy with improving its structural fiscal position; enabling countercyclical fiscal management in the short-run. The decisions of policy makers remains in limbo as the after-math of the financial crisis still lingers in majority of developed economies whilst early symptoms of the next financial crisis become more apparent, especially with fears of China leading itself first into a potential crisis. The debt capacity of many economies has been stretched beyond its means through slow nominal GDP growth combined with an accumulation of leverage. As such, the process for deleveraging is complex and the fear of a coming crisis will continue. References: (2014). Record global debt risks new crisis - Geneva report. Available: http://rt.com/business/191716record-world-deb-crisis/. Last accessed 26th Nov 2014. Bird, M. (2014). A ‘Poisonous Combination’ Of Debt and Stagnation Could Sink The Recovery Read more: http://www.businessinsider.com/genevareport-2014-2014-9#ixzz3KAM3n6de. Available: http://www.businessinsider.com/geneva-report2014-2014-9?IR=T. Last accessed 26th Nov 2014. Cuestas, J.C., Gil-Alana, L. & Staehr, K. 2014, “Government Debt Dynamics and the Global Financial Crisis: Has Anything Changed in the EA12?”, Economics Letters, vol. 124, no. 1, pp. 6466. 2Luigi Buttiglione, Philip R. Lane, Lucrezia Reichlin and Vincent Reinhart. (2014). Deleveraging? What Deleveraging?. Geneva Reports on the World Economy. 16 ( ), . Ruffer, R., & Stracca, L. (2006). What is global excess liquidity, and does it matter? European Central Bank, Working Paper Series: 696. Retrieved from http:// ezproxy.nottingham.ac.uk/login??url=http://search. proquest.com/docview/56475423?accountid=8018 Von Peter, G. (2012). Review of: Liquidity and crises. Journal of Economic Literature, 50(4), 1109-1113. Retrieved from http://ezproxy.nottingham.ac.uk/ login??url=http://search.proquest.com/docview/126 5877282?accountid=8018


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BT vs. Sky – The Broadcasters Derby Adam Williams (BSc Economics & Politics, ‘16, The University of Nottingham)

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rom the tunnel the two sides emerge to play the biggest game this season. Like most teams they have spent millions over summer, but unlike most teams not a penny has been spent on players. The battle of the media oligopolies, BT and Sky, has reached its second season. The stakes are high for both sides as they compete for the prize of a share of the market.

the consumer by making its package more desirable, fending off any more deserters or even tempt back customers it had previously lost to Sky. Sports viewers are a key demographic for BT to target, as the content has a guaranteed appeal so can be easily used to tempt customers, but BT are not the first to try to tackle Sky’s dominance in the Sports broadcasting market.

Sky’s line up is well established, it currently leads the pay-tv market, and has made an impact in the broadband market coming from nothing in 2006 to gain a 20% share of the market. Sky is also the market leader in sports broadcasting, being able to boast live coverage of 116 premier league matches on its Sky Sports channels, its monopoly over the market is only prevented by Ofcom regulations. Sky emerges as the team to beat.

ESPN, the previous owner of BT’s rights, were well placed to take on Sky through their backing from Disney. But they frequently failed to turn a profit and proved that rights alone were not enough to take on Sky, even their predecessor Irish broadcaster Setanta couldn’t attract the viewers. BT is perhaps better placed than both of these companies, with a well-established brand in the market, in addition to millions of customers already subscribed to its other services. But maybe the winning factor in its strategy is its ulterior motivation to purchasing the sports rights.

BT has made key investments in its lineup, once the nationalised telecoms provider across Britain its influence remains in the phone and broadband market boasting a 31% share of the market. The company initially moved into the television in 2006 but suffered from a slow uptake in its BT Vision service, with only 150,000 subscribers in 2008 (BBC News, 2008). Despite its low share of the pay-tv market, BT shocked the market in 2012 after outbidding ESPN to pay £246m a year to gain the rights to broadcast 38 English Premier League football matches over the next three seasons to create its own sports channel, BT Sport, to rival Sky’s offering. Sky and BT are seeking to dominate the household, providing the three services of Phone, TV and Broadband. Only 30% of households take the full set from the same company, but this is a figure they are keen to increase. In 2012 Enders Analysis estimated 38% of BT’s 6.5m broadband customers bought their pay-tv from Sky, customers who frequently leave BT to take up the full Sky package. The key strategy for BT, is tempting

“Once they do start charging, audiences will start withdrawing, and that will undo whatever they have managed to achieve in shoring up broadband” The match is really taking place in the broadband market, Sky only entered the market in 2006 but has been managing to add almost 400,000 more customers than BT prior to the launch of BT Sport. When

launching BT Sport, the company took the strategy of offering the channels free of charge to broadband subscribers, a smart way to attract new customers and safeguard its current phone and broadband consumers from being poached by Sky. In 2013 BT added more broadband subscribers than Sky, the first time since 2007, with its quarterly consumer revenue increasing by 6% in the third quarter of 2013, the highest increase in a decade. In May 2014, nine months down the line after the launch, BT Sports is on the screens of 5m households, the bet seems has paid off. Sky’s net new broadband subscribers fell from 119,000 in the first quarter of 2013 to 70,000 a year later. But BT’s initial success is really just the score at half-time in this match between the two broadcasters. Sky won’t stand by idly as its broadband subscribers begin to decline and BT gains a foothold in its pay-tv empire. Partly owned by Rupert Murdoch’s 21st Century Fox, Sky has this year taken control of Murdoch’s other European paytv ventures, transforming Sky into a pan European broadcasting giant, with over £11bn in revenues and 20 million customers across the UK, Germany, Italy, Austria and Ireland. Suddenly the game has changed, Sky is far more powerful, and whilst Ofcom may

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prevent it from creating a Sports monopoly, Sky may be far more confident to engage in a pricing war with BT. BT’s has so far relied upon being able to offer its service free of charge to broadband customers. “It’s a hellishly expensive way of trying to marginally increase broadband,” comments Toby Syfret at Enders Analysis. “And they can’t put off charging forever. Once they do start charging, audiences will start withdrawing, and that will undo whatever they have managed to achieve in shoring up broadband.” The result of BT introducing a charge is debateable, but there is little debate over the charge eventually coming into play, especially after BT recently outbid ITV and Sky for Champions League rights paying £897m to broadcast the matches. So the match continues, but the outcome now seems far less certain. BT has made its move, now it’s down to Sky to consider its next strategy, decisions economists outline in game theory. It can already anticipate BT’s next move of raising prices, now Sky could have a number of options. Sky could do nothing, in expectation that once BT begins charging for its sports content, users will be more likely to switch back to Sky. But given the weakness in Sky’s content having lost Champions League matches, its package becomes far less attractive and less likely to tempt customers back. Sky argue that European football only really represents about 3% of its viewing figures for its sports channels, compared to 18% for the Premier League, so the loss of this content has little affect upon its ratings. But undeniably it reduces its package’s value, so customers may feel ripped off if Sky refuse to change the price, and do nothing to fill the void. So maybe it seems that following this strategy, Sky may well score an own goal. The sports giant has opted for a different strategy, moving away from its sports content in an effort to assert itself as a varied broadcaster. Sky would much rather spend

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£897m on creating more “original British programmes”, such as Mad Dogs or Strike Back, putting it in direct competition which the terrestrial broadcasters (BBC, ITV). Having lost the lucrative sports rights, perhaps this is the best direction for Sky, it has few other options in terms of gaining additional football rights. But the risk with this strategy

seems to have emerged the winner at this early stage. Much like a successful signing, the multi-million pound gamble appears to have paid off, albeit only creating a small chink in Sky’s power in terms of market share, but BT have Sky scared. But some are unconvinced by this battle of the media giants, Claire Enders, an analyst, has warned of the increasing competition for sports rights creating a risk of “mutually-assured destruction”. BT may be celebrating now but the season is far from over. References: BBC News, 2008. BT profits hit by restructuring. [Online] Available at: http://news.bbc.co.uk/1/hi/ business/7231990.stm [Accessed 10 December 2014]. Garside, J., 2014. Football bet is paying off for BT Sport. [Online] Available at: http:// www.theguardian.com/

is the same reason BT followed the sports broadcasting route rather than the drama. It is far harder to create a hit drama or comedy which pulls in the ratings and subscribers than it is to lure football fans to watch the latest match. Diversifying its output may work well for Sky in the end, especially given its new size and power across Europe enabling it to pull in higher quality content, but for now at least the final score is uncertain.

Sky argue that European football only really represents about 3% of its viewing figures for its sports channels, compared to 18% for the Premier League In the end this match may be over, but the rivalry is set to continue. There may well not be a Nash equilibrium for these two sides, BT

media/2014/may/11/football-bt-sport-telecomschampions-league-rights [Accessed 11 December 2014]. Goodley, S., 2014. The real Premier League rivalry kicks off: Sky Sports v BT Sport. [Online] Available at: http://www.theguardian.com/media/2014/aug/14/ premier-league-bt-sport-sky-rivalry-rights [Accessed 10 December 2014]. Mance, H., 2014. Sky vs BT: the audience battle. [Online] Available at: http://blogs.ft.com/ ftdata/2014/01/31/sky-vs-bt-the-audience-battle/ [Accessed 12 12 2014] Preston, R., 2013. Can Sky bounce back from BT defeat?. [Online] Available at: http://www.bbc.co.uk/news/24882293 [Accessed 13 December 2014] The Economist, 2013. Arms race. [Online] Available at: http://www.economist.com/news/ britain/21573147-leading-broadband-and-paytv-providers-strengthen-their-forces-arms-race [Accessed 12 December 2014] Thomas, D., 2014. BT reaps benefits from pay-TV drive. [Online] Available at: http://www.ft.com/cms/s/0/047725ba8a4e-11e3-9c29-00144feab7de.html?siteedition=uk #axzz3Lbw0txdf [Accessed 10 December 2014]


Insight

The Nottingham Economic Review

CeDEx Insight: Daniele Nosenzo

Professor, Faculty of Social Sciences at The University of Nottingham Interviewed by Oluyinka Olutola (BSc Economics, ‘16, The University of Nottingham)

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.rofessor Daniele Nosenzo [BSc, MA .(University of Genoa) MSc (Essex) PhD (Nottingham)] is an experimental and behavioural economics lecturer within the University of Nottingham, and also works at the forefront of the experimental work done at CeDEx (Centre for Decision Research and Experimental Economics) as the centre’s Deputy Director. His research interests include: behavioural and experimental economics; public economics, organisational and labour economics; contract theory and game theory. As an important member of the CeDEx team, Daniele, along with his colleagues, invites students to take part in experiments that add to the growing body of research being accumulated in the experimental and behavioural subfield of economics. The importance of experiments and behavioural analysis continues to grow into an ever more important part of economics as an area of study and way of relating abstract areas of the subject, such as game theory, to the real world. Furthermore, the work done at CeDEx continues to be ground breaking as the centre tries to explain the phenomena regularly observed in both the behaviour of firms and people within the economy. What research are you and the department undertaking at the moment? Well CeDEx is a very large group it’s about 50 people between staff and PhD students so the research varies from analysis of individual decision making, for example under risk and uncertainty, to analysis of strategic decision making so revisions of public goods and task exchanges. It depends there’s lots of variety in the research. I’m personally working on social norms, so trying to understand whether there’s a way to measure social norms; what drives compliance to practical norms or non-compliance to norms and how these norms effect behaviour in a variety of different situations. It’s a large group so there’s research of all sorts, from theory to empirical, lab experiments, field experiments there’s a lot of things going on.

Do you work a lot with Fabio Tufano? I’ve worked on a project with Fabio, although he also works on slightly different things than I’ve been working on but yeah we do work on some things together. What do you think makes CeDEx unique? In the UK there are a few universities that have an experimental group, there’s East Anglia, York, Warwick, Birmingham so there are a few places that have an experimental group. I think what makes us unique within the UK departments is that the group is extremely large here, it’s about 50 people working on related areas, it’s a huge number, in some other universities this is the size of a department and instead we are part of a department so it’s a very large group. As I was saying before it has a lot of variety in what we’re doing so we have theorists like Daniel Seidmann, Silvia Sonderegger, Maria Montero, Alex Possajenikov, they’re all part of CeDEx and have theoretical oriented work. We have empirical work, lab work, field work, Abigail Barr has done lots of field experiments in the UK and across the world so there’s lots of different angles that we do our research from so that’s quite unique in terms of having all these people, with all these backgrounds in the same place. This has also been recognised by lots of funding institutions because we received this funding from the ESRC (Economics and Social Research Council) and the European Union they’ve funded either researchers or groups of researchers based at CeDEx, I forgot the numbers but I think we’re talking about billions of pounds so it’s a lot of input coming from external funds that recognise the uniqueness and strength of the group What advice would you offer to someone considering behavioural economics as a dissertation topic? Well definitely I think the first thing that I’d advise them to do is to take the two modules, the Year 2 and 3 modules, so that’s an example of how you should start planning your dissertation ahead of time instead of waiting till September of your third year

because, for example now, I have a couple of students who are interested in behavioural topics, they would be interested in doing some experimental type work for their dissertation but they didn’t do Year 2 experimental, they didn’t do Year 3 experimental and now it’s too late for changing their optional modules so they’re struggling a little but because they don’t have the background, that’s definitely the first thing you should think of, getting some training in those areas. In terms of topics, there are loads of topics you can explore with experimental economics so there’s really no restriction; it’s about your willingness to think outside the box. Sometimes one advantage of doing work in behavioural and experimental economics is often, if you can’t think outside the box, you can be a bit more original than you’d otherwise be as you’ll collect your own data and that already gives you some originality and if you combine that with some differentiation relative to the literature that could come out a nice piece of work. What are the most important questions still to be answered in behavioural economics? There are definitely questions about the preferences of individuals so there’s been a lot of work done in terms of what motivates individuals to make choices both in strategic and non-strategic environments and I think there’s been a consensus that the model that individuals are expected utility maximisers and only care about themselves is perhaps not the most adequate model to describe representative behaviour but there is no consensus on how to replace this traditional model or which alternative models can better accommodate the deviations we’ve seen from the traditional model, there I think there is still work to be done, whether it’s the most important question, I don’t know, but it’s an important question. Also I think there’s been some debate recently about what contribution can behavioural experimental economists give to explanations about the financial crisis so that’s something I feel as a field we’ve not really engaged with

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but it’s something definitely of importance so it’s something perhaps we ought to look more into. How do you think the work at CeDEx compares with that of other universities? There is some strength in numbers in the sense of collaborations as here it’s very easy to collaborate with someone that has a very different background from yourself and usually when you combine different backgrounds something strong can come out. Part of this grant that I’ve been telling you about is from the ESRC and finances a network of universities it’s called NIBs (Network of Integrated Behavioural sciences) and this involves three universities: our university, Warwick and East Anglia and these, are the three universities that have the stronger representation of behavioural experimental economists in the UK so this brings all three universities together and the network is built as an attempt to stimulate collaborative projects between these three universities so in this sense we have moved towards an integration of the work done here

and in other places. This network has been going on for 2 or 3 years so now there are many projects between myself and other people in CeDEx with people at East Anglia, one at Warwick, so there’s a lot of common research done. Since experimental economics is a relatively new area of economics do you think it will play an increasingly important role in the future? I think so, from a niche area of economics as it was in late 90s and early 2000s its importance has increased a lot over the past years, just looking at the number of papers behavioural and experimental economists publish in top economic journals is enough to convince you of that, before it was very rare to find these papers published in economics but now almost regularly in any issue of the top journals you have one, two or more experimental papers or behavioural economic papers so there’s definitely a lot of importance. Also the breadth of the questions we’re looking at has expanded and as I mentioned earlier perhaps we should expand it further

but there is definitely a lot of contributions these sub fields can make to general knowledge in economics. I think there’s also increased interest from policy makers and policy bodies to have consultancy with behavioural economists to help them design better policies so recently, for example, we’ve been contacted by a council that wants to increase the registration of students to their electoral register and they are open to explore strategies that are suggested by behavioural economists as a way to improve their policies. There are more examples, there’s the NUDGE team, it’s a unit that consults for the government and they do research applied to policies that change from time to time, they’ve done lots of stuff from tax compliance to health camps and they work for the government so there’s a lot of applied interest as well beyond the academic value of this. For more information on the work done at CeDEx visit their website: www. nottingham.ac.uk/cedex or follow them on twitter: @UoNCeDeX

Should the Western Powers continue to Give Foreign Aid to Less Developed Economies? Steven Thavendran (BSc Economics, ‘17, The University of Nottingham)

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ver recent years there have been .numerous debates about whether to continue to supply foreign aid to developing economies. As countries try to enforce austerity measures in order to reduce national debt, it seems like foreign aid is one of the areas of expenditure that governments cut in order to try to solve the issue. In reality, it is unlikely that a cut in foreign aid will be hugely successful in trying to solve expenditure problems, as few countries provide more than the 0.7% target by the UN on foreign aid. Despite this minuscule amount that is spent on foreign aid, there is a huge deception, partly due to media perception, that a much larger amount of budget is spent on aid. 27% of government budget was what the average

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American assumed was spent on foreign aid when asked through a survey conducted by an independent researcher (The Guardian, 2012). 59% of those asked went on to conclude that ‘too’ much was being spent on other economies. This common misperception can be accredited to advertising and media with much humanitarian aid from countries being heavily publicized with endorsements by celebrities or through charitable groups such as Oxfam (Moyo, 2009). The aid packages provided in the wake of Hurricane Sandy and the Japanese Tohoku earthquake were particularly emphasised in media content. The broad category of systematic aid includes both multilateral aid and bilateral aid and in

general classifies any transfer of funds in an attempt to improve the long term wellbeing of a country. Transfers between government to government and multilateral organisations which involve transfers with the ‘middle man’ of an institution such as the World Bank are forms of systematic aid. Concessional loans or grants are given to countries. Concessional loans have been transferred below typical market interest rates in an effort to relieve the pressure of repayment by developing countries (Ray, 1998). The latter involves transfer of funds with no expected repayment. Of course it is understandable why economies who receive aid will prefer grants but through careful consideration all forms of aid especially the latter have severe repercussions and


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possibly provide a convincing argument on why we should cut our aid. A culture of dependency has also been argued by critics of foreign aid. Perhaps the main fuel that drives the argument for cutting foreign aid is corruption. Over the last 60 years over 3 trillion pounds has been spent on foreign aid yet some may argue the effects are minimal and there is little evidence to show that foreign aid is an effective measure (Easterly, 2003). However there are those who support foreign aid and believe that the current levels should be maintained.

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from several decades ago (Elliott, 2013). Of course there is still much room for improvement but considering that Africa as a continent had one of the highest illiteracy rates the current policy is proving effective. Third world economies are rife with poverty which has been brought about through a multitude of ways but indeed the most significant factor has always been civil wars which in particular foreign aid has tried to prevent or in the worst case has helped to rebuild an economy after such effects have occurred. Ellen Johnson

This point of view is shared by the current UK coalition which despite ongoing pressure by the public has promised to increase their aid budget to the expected UN target of 0.7 percent of GNI by the end of 2013, despite ongoing cuts in other forms of expenditures. This will increase the total amount of countries that have obliged by the UN Target of foreign aid to 6. It is also foolish to neglect the several success stories of foreign aid. Taiwan, Botswana and South Korea have been transformed by foreign aid with the latter growing from a war torn country with an unstable government into G20 major economy as a result (Solarz, 1991). The Marshall Plan is also a significant argument of a scenario where foreign aid has worked effectively. From this it should be clear that foreign aid to third world economies should not be cut. Foreign aid is usually delivered to third world economies for the primary moralistic purpose of reducing poverty, and so far it has done exactly this. The foreign assistance act’s primary goal was ‘the alleviation of the worst physical manifestations of poverty (Lawson, 2013).’ The progress in the eradication of HIV/AIDS in Africa can be accredited to the growth in foreign aid over the last decade. Now over 8 million people receive the appropriate medication to deal with the disease growing staggeringly from the 300,000 people who received the medicine around 11 years ago (Care, 2004). There are further examples which strongly suggest that foreign aid has been effective in reducing poverty such as the infant mortality rates dropping by around about 41% in Africa (Care, 2004). As a result of the foreign aid that has been received by Africa almost 50 million more children have enrolled into primary schools and are at least getting a primary education, a dramatic improvement

Sirleaf, the female president of Liberia, in particular applauded the foreign aid that has helped rebuild her country after they were ravaged by civil war (Sirleaf, 2011). The events of civil war can highlight the devastating impact of poverty, with almost the entire population of a country feeling the effects. Many of the arguments that are against the use of foreign aid in third world economies support the idea the foreign aid is not an effective policy. Foreign aid money has ended up in the hands of tyrant dictators from Mobutu Sese Seko in the West of Africa, to Idi Amin in the east of Africa. Instead of using this foreign aid to support the people’s needs, this money has only brought about more poverty

across the country as the dictators were able to expand their territory. $22 million dollars was provided to Emperor Bokassa of the Central African Empire during his coronation a man who would later continue to oppress his people and use all the money to fund his own lavish dreams (Moyo, 2009). Dambissa Moyo claims that $5 billion of foreign aid money was stolen by the president of Zaire and amount equivalent to that of the country’s entire external debt. Instead of using that money wisely on trying to reduce the amount of people in his country who are in absolute poverty a portion was used to fund his daughter’s wedding and to hire a Concorde to fly both his daughter and his pending son in law to Côte d’Ivoire to host a lavish wedding using the donor’s money (Moyo, 2009). It is crazy to assume that the lending to this corrupt leader was beneficial and it will have only caused more turmoil than good. Even money that is forced for use on infrastructure has proved to benefit only the corrupt elites. Leaders who are forced to build infrastructure give out contracts to not the most qualified personnel but the organisation or group that will result in the central government keeping the most money. Shoddy workmanship results and like the recent situation in India where buildings have fallen from almost nothing deaths will result. Bribery in the political leadership is rife preventing a fair and transparent political structure, hindering the potential for improvement which foreign aid could provide (Lal, 2011). Even though it is clear that corruption in third world economies is ever present this should not persuade the government to cut foreign aid but rather rethink how easily foreign aid is given to kleptocratic countries. In addition to corruption, critics can argue that foreign aid does more bad than good as it created a ‘culture of dependency.’ 15% of the continent of Africa’s GDP results from aid, almost five times the dependency of the war torn countries after the Second World War. Aid has encroached into nearly every sector of the continent from the healthcare to the defence industry, so if it were to be suddenly removed the effects would be stark as every industry would begin to suffer (Moyo, 2009). A fall in healthcare aid without secure political backing and transparency, for example, would

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likely lead to the situation worsening over time, requiring even more aid than previously to improve standards.. This culture has polluted the minds of governments as aid is viewed as a ‘permanent, reliable, consistent form of income’ (Moyo, 2009). This problem stems from the fact that aid has been given to countries who are building their economies from nothing unlike that of the economies that received the infamous Marshall plan as they already had a strong enough foundation to rebuild and aid money had only been used in the rebuilding expenditure. As a result when the aid had stopped no other sector had been detrimentally affected. Overall, foreign aid should not be cut, as it brings a multitude of benefits to both the donor and the recipient. Strategically and tactically it provides both improved trade relations and an increased security. It should be provided for the alleviation of poverty and if aid is given by the donor for the purpose of trade there are alternatives to improving trade relations without the use of foreign aid that should be considered by the donor. This has been shown with the case with India which has maintained good trade relations with the UK even though by 2015 we will be providing them with no foreign aid. There are several alternative to improving trade relations without foreign aid. If this is achieved a larger proportion of foreign aid will be provided to third world economies rather than emerging economies for which it is not largely necessary. Multilateral organisation such as the World Bank need to enforce stricter guidelines and conditionality on the

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foreign aid they are supplying to third world economies. Conditionality are being applied to aid packages but there is little fear by donors if they were to stray away from this as they will only get a ‘slap on the wrist’ instead of the whole aid package being withdrawn. Countries will need to be given more guidance in which areas to invest in by donors or multilateral organisations otherwise aid is likely to be misspent. Fundamentally combating corruption will need to be the first priority that the World Bank should address. Corruption will always be an issue that has to be dealt with and rethinking of the way foreign aid is given will need to the second priority. There should be complete transparency of the government of the recipient before foreign aid should be given and even when there is a probability that there is corruption countries should immediately withdraw foreign aid. The QDDR, the US industry that plan the budget of foreign aid, have the right objective as their budgets are ‘based not on dollars spent, but on outcomes achieved’ and similarly most systematic aid organisation should adopt a similar policy (Lawson, 2013). However this should not be an excuse to spend less on foreign aid but rather a means to increase the effectiveness of the aid that is being supplied. There also needs to be a rethinking of the performance indicators multilateral organisation look at as a means of proving whether aid is ‘effective.’ Long term outcomes that are achieved should be considered such as how much healthcare

has improved using indicators such as health service and life expectancy but organisations should also take into consideration other factors that might have an effect like an introduction of new medicine. We shouldn’t assume that eventually these changes in legislation will come into consideration and that eventually countries will work out where best to invest. References: Care. (2004). Care. Retrieved 2013, from http://www. care.org/getinvolved/advocacy/pdfs/foreignaid.pdf Easterly, W. (2003). Can Foreign Aid Buy Growth? The Journal of Economic Perspectives , 23-48. Elliott, L. (2013). Money may be tight, but ‘smart aid’ to developing countries can really work. The Guardian. Lal, E. (2011). A Hurting Hand: Why Foreign Aid Does Not Work. Azusa Pacific University. Lawson, M. L. (2013). Does Foreign Aid work? Efforts to evaluate U.S. Foreign Assistance. Washington D.C: Congressional Research Service. Moyo, D. (2009). Dead Aid. Penguin. Ray, D. (1998). Development Economics. Princeton University Press. Sirleaf, E. J. (2011). Foreign aid is not a waste of money. The Telegraph. Solarz, S. J. (1991). Foreign Aid Serves US Interests - Keep it Flowing. The Christian Science Monitor. The Guardian. (2012). US foreign aid benefits recipients – and the donor. The Guardian.

Can We Save the Culture of Banking? Hannah Kirby (BSc Economics & Politics, ‘15, The University of Nottingham)

On 12th November 2014 a YouTube video of Paul Mason started trending. ‘I’m just sick of it’ he exclaims to the cameraman, whilst moving agitatedly outside RBS’ headquarters. Mason is a journalist, and his words emphasise his exasperation at the somewhat mediocre regulatory response to the latest banking outrage: rigging of the Foreign Exchange (Forex) markets. The distress in his voice echoes how tiresome this topic has become, not just within the media. Six years on from the financial crash, news of dodgy banking behaviour has lost its shock factor, appal or even interest. It

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is beginning to seem as though current regulation methods have lost their impact, both as a threat to the receivers and a successful tool for those implementing them. Last November saw traders within a handful of the world’s ‘big banks’, including state owned RBS, attempting to manipulate the Forex market. Collusion between firms allowed them to share client information and drive prices of certain currencies downwards during the ‘4pm fix’. Essentially what this does is enable firms to influence market prices and make consid-

erable profits in currency sales as a result. Whether or not these particular manipulations actually had a significant impact on consumers is not clear, but trust between the consumer and those working within the financial sector has once again been called into question. It also brings doubts regarding the strength of regulatory power. The standard protocol for this kind of ‘bad behaviour’ has, in recent years, been heavy fines. Globally, UBS, Citi, JPMorgan Chase, HSBC, RBS and Bank of America settled at


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fees of over 2.5 billion pounds for the Forex scandal. In the UK this decision was made by the Financial Conduct Authority (FCA), the city’s watchdog, whilst the USA has seen investigations from other bodies including the US Commodity Futures Trading Commission and the Department of Justice. These numbers break records for the FCA in becoming the highest penalties ever imposed – far higher than those implemented in 2012 following the Libor scandal. At the time of its revelation, the Libor rigging scandal was a global outrage. The general public were shocked at the way in which highly regarded elites of the banking sector had acted so casually to alter the market. The ideological dream of ‘laissez-faire’ market forces was apparently not so laissez-faire. In fact, they were being manipulated by a handful of society’s most intelligent and highly paid. One Guardian Editorial refers to ‘intellectual intimidation’ by this elite, maintaining a reputation that for a long time, many of us, including politicians and regulators, dared not question. In 2008, and throughout the publication of scandals such as Libor, we came to the slow realisation that many of these individuals were less clever than we thought. Today, few would argue that the culture of corporate banking would be condoned in many other sectors of society. What we would have hoped is that, by now, this culture would have started to change. What events such as the more recent Forex scandal show, is that in reality, little has. What we must decide is whether or not £2.6 billion of fines are going to make a positive impact on the way in which the financial sector operates. Journalists like Mason are demanding to know why further action isn’t being taken, for several reasons. Firstly, many of the regulatory changes that have occurred over the past six years appear to have always been ‘too little, too late’. The FCA was formed 18 months ago, following views that its predecessor, the FSA, had effectively failed to monitor the banking sector. Not enough rules had been implemented in order to prevent some of the incidents at the heart of the financial crisis. The Forex case is similar - highlighting how little regulation there has been within one of the world’s biggest and most influential markets. It has been pointed out that in some cases, the individuals responsible may not have broken specific rules; but nevertheless failed to maintain the moral standards that much of society would believe to be commonplace. Many of those at the top have neglected their responsibilities and taken advantage of the system.

Secondly, whilst regulatory bodies have imposed a torrent of fines over the past six years, the extent to which banks see these as a real threat is debatable. To the general public, ‘billion’ sounds like an impressive number, yet these are not fees that the big banks will struggle to cover. Despite this, Andrew Bailey of the Bank of England has argued for regulators to better co-ordinate their fines. Whether these numbers are weighing down on capital stocks or not, their impact upon an individual employee’s behaviour has not been noticeable. Especially when those individuals are some of the brightest in the world, and are highly regarded assets to the organisations in question. Banks have made it clear that regulators must take care not to over-regulate. If traders start ending up in handcuffs, the number of top graduates fighting to join the banking sector may start to diminish. It can also be argued that it is not just the punishment that is important. Too much regulation can be overly constraining. The ‘endless tinkering’ with rulemaking has left them a bit confused. According to The Economist, no bank can be sure, from the plethora of new rules, what their minimum capital requirements actually are. Finally, what we don’t see today, at least within Britain, is substantial support from others at the top. The Guardian went as far to suggest that ‘clueless politicians meddle [with the banking sector] at their peril’. This seems true, at least to some extent. What we lack are champions of financial regulation within the political sphere. Whilst Mark Carney has played an active role in backing a substantial amount of regulation, support from other influential individuals has been less obvious. There are a few leading the way. CEO Antony Jenkins has made it his goal to change the culture within Barclays. Jenkins has not yet settled on a fine for the Forex scandal, claiming he expects it to total at more than £500million. But for his good deeds he has been mocked - dubbed ‘Saint Antony’ by his City peers. He has done more than others in a notable move to change the culture. The British Government holds substantial shareholdings within both RBS and Lloyds, suggesting there is more scope for its influence in reforming how these organisations function. This would show political support for a change of behaviour with in the financial sector, something that should filter down into younger generations. With these arguments in mind, finding the optimum path in terms of regulation is a difficult task. What is clear is that culture needs to change, and that strictures imposed over

the next few years will play a significant role in achieving that. A recent scientific study in Switzerland provided empirical evidence that bankers were more likely to be dishonest than those from other career paths. Its researchers argue that this is caused by the fact that placing financial gain above all else encourages these character traits. Regulators therefore need to work to change the way in which bankers behave. It seems apparent that fines alone can surely not achieve this. Economic commentators have begun to suggest that suspensions from trading would be more effective, though these have been met with fears of disrupting the market. It is imperative, as Paul Mason argues, that something must be done. In Britain, the regulators themselves have shown that they believe the only move forward is to ensure that there is a fundamental shift in the way in which banks operate. At a conference last month, head of the FCA, Martin Wheatley, described how ‘there are very few more pressing issues than corporate culture’. There is a general understanding that the credibility of harsh fines is coming into question. But the regulators cannot act alone. There needs to be a will for both monitors and participants to see a positive change within the financial sector. Those with the power to influence must use this where they can; politicians must not stand shy of supporting the regulators, rather than criticising. If something effective is not done soon, those fighting for change may lose hope, and this kind of corruption of culture may be unstoppable in the future. References

-http://www.bbc.co.uk/news/business-30190753 -http://www.bbc.co.uk/news/business-18671255 -http://www.economist.com/news/finance-andeconomics/21632647-new-rules-hemming-banks-willmake-it-easier-let-them-failwith-luck-buffering -http://www.economist.com/news/leaders/21632476-latest-global-capital-rules-make-banks-safer-are-sensiblemuch-else-regulators-are?zid=294&ah=71830d634a0d95 58fe97d778d723011d -http://www.ft.com/cms/s/0/aa812316-69be-11e4-9f6500144feabdc0.html#slide0 -http://www.theguardian.com/commentisfree/2014/ nov/16/banking-changing-slowly-but-culture-still- corrupt -http://www.theguardian.com/commentisfree/2014/ nov/16/observer-view-on-banking-scandals -http:// www.theguardian.com/business/2014/nov/12/foreignexchange-fines-ubs-hsbc-citibank-jp-morgan-rbs-penalties-market-rigging -http://www.theguardian.com/ commentisfree/2014/nov/13/guardian-view-foreign-exchange-scandal-banks-busted -http://www.reuters.com/ article/2014/11/21/us-science-banking-honesty-idUSKCN0J51UU20141121 -http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/11300185/Barclays-500m-for-forex-settlements-is-not-enough-says-chief-Antony-Jenkins.html -https://www.youtube.com/watch?v=Wf7a53y9RRM#t=49

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The Nottingham Economic Review

The Point of Sufficiency: An Analysis of the Limits to Economic Growth Joshua Martin (BSc Economics ‘15, The University of Nottingham)

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ince the birth of modern economics, countries all over the world have striven for economic growth – the increase in value of what is produced in a country each year. Countries pursue economic growth for the widely accepted belief that growth is the only guaranteed method of reducing poverty and of raising living standards. This essay will examine the possible drawbacks to growth and question the accuracy of the aforementioned belief, by showing that no further gains to standards of living are guaranteed after a certain point, which I will term the ‘Point of Sufficiency’. Finally I will suggest what the governments of countries above the Point of Sufficiency should do. Drawbacks to growth Economic growth is undeniably a priority for many economies around the world, especially in developing countries. Growth is a reliable method of reducing poverty and raising living standards, but I argue this only holds up to a point. Through increased production and investment, growth can also create jobs, which are important for prosperous and meaningful lives. However growth has downsides too: many forms of environmental damage – the cutting of rainforests, increased carbon emissions, landfill and waste – are arguably direct consequences of growing economies. Production has natural and normal sideeffects, but due to the increasing levels of output that growth inherently demands, these side-effects can become unsustainable. In some cases it can also be argued that economic growth has been a factor in increasing inequality within a country, such as in Russia and many oil producing countries in recent years. Western countries including the UK, the US and much of Europe, have also seen increasing rates of inequality over the past 30 years. As an issue that is being increasingly debated, it seems that inequality

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may be costly in ways that aren’t just social factors. In his recent bestseller Capital in the Twenty-First Century, French economist Thomas Piketty argues how rising inequality poses a great economic danger since it can lead to economic and political instability. Nobel Laureate Joseph Stiglitz found evidence recently that inequality can hinder economic growth. That is not to say that, if managed well, growth cannot have positive effects on Figure 1

the distribution of wealth; for many years after the Second World War Britain was able to grow and become more equal. These points alone illustrate the importance of questioning the belief that growth is always the most important goal for a country’s success. Perhaps growth is not as beneficial as is widely believed; could there come a time where, due to increasing disadvantages to growth, the gains are limited at a point of sufficiency? The answer, which I will now explore, largely depends on whether the gains to growth can similarly increase consistently. Comparing growth to happiness In order to conduct an analysis of economic growth on a population’s wellbeing, we must first define this wellbeing in a way that can be measured. To do this, I have used measures of wellbeing that are widely available for a number of countries: the Human Development Index, produced by the United Nations Development Programme; the

‘Experienced Well-being’ component of the Happy Planet Index, produced by the New Economics Foundation; and the Where-tobe-born Index, produced by The Economist Intelligence Unit. To compare this with economic growth in a way that is relative to the size of the economy, I have used GDP per capita as the dependent variable. While this does create some endogeneity problems for some of the variables – for example since one of the components of the HDI is in fact GDP per capita and therefore a natural positive correlation will be observed between the data – this problem is unavoidable without creating a new measure of wellbeing. The first measure of well-being I will consider is the Human Development Index (HDI). The HDI can vary from 0 to 1, with 1 being the best possible score. It is calculated using GDP per capita, life expectancy, expected years of schooling and mean years of schooling. Figure 1 illustrates that there is a clear positive correlation between GDP per capita and the HDI score; this is unsurprising, and not a fact that I refute, especially given one of the components of HDI is itself GDP per capita. I propose that after a level, the upward trend breaks down, and hence increases in GDP per capita fail to consistently add to the HDI score. The Point of Sufficiency is shown by the blue vertical line at around $28,000, chosen due to observational analysis of the graph – simply, there appears to be clear difference in the data before and after this level. Considering this break, one can observe a strong positive correlation to the left (correlation coefficient r = 0.85), and surprisingly a negative correlation to the right (correlation coefficient r = -0.17). The black line shows a logarithmic trend line for the whole set, which has a coefficient of determination R2 value of 0.89, and shows the diminishing benefit of GDP per capita. There are 187 observations.


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The second measure comes from the Happy Planet Index (HPI). The HPI aims to rank countries on how their population lead “long, happy and sustainable lives”. Focusing on the “happy” part of this, I have used the ‘experienced well-being’ component, as a measure of a population’s well-being. Figure 2 shows a similar story as with the HDI, with a trend line mapping the data quite well (R2 = 0.54). To the left of the suggested Point of Sufficiency, we observe a positive correlation (r = 0.48) and to the right we see a far weaker positive correlation (r = 0.13). There are 151 observations. The final measure to be considered is from the Whereto-be-born Index. This considers 11 main indicators, including: GDP per capita, life expectancy at birth, the quality of family life (based primarily on divorce rates), the state of political freedoms, the unemployment rate, personal physical security ratings (based primarily on recorded homicide rates and ratings for risk from crime and terrorism), quality of community life (based on membership in social organisations), and gender equality (measured by the share of economic growth towards improving other measures of wellbeing, such as the three discussed. While growth does occur naturally with technological advances and productivity shocks, most current governments focus continually on achieving more and more economic growth. Growth could still be monitored, but a different headline rate of development should be used instead. Policies should centre on improving the population’s feeling of security, fulfilment and health. This would require governments to spend more on policing, education and healthcare, perhaps employing more people in all of these areas. I would support the adoption of the 35 hour workweek, a system used currently in France, to give the population more leisure time; indeed family life was a component of well-being in the HPI. The objectives of the system are to reduce unemployment and improve quality of life, the latter being the primary topic of this essay. While all of this would cost the government money which they would need to raise through taxation, a happier workforce is likely to be a more productive one, as shown by Oswald, Proto and Sgroi in their experimental

seats in parliament held by women). Figure 3 below shows a strong positive correlation to the left of the cut-off point (r = 0.71) and a far weaker positive correlation to the right (r = 0.16). The trend line shows strongly diminishing returns to growth, and has R2 of 0.73. There are 79 observations. Figure 2

In summary, I have compared GDP per capita to three different indicators of a population’s well-being, all of which are large samples and are widely available data from trusted sources. In all cases a logarithmic trend line can be applied to the data, showing diminishing returns on well-being from growth, and these Figure 3

trend lines fit the data well. By dividing the data into two sections – before and after a cutoff point at $28,000 – it is possible to see a very different trend in each case. Conclusion In conclusion, I think it is clear to see that the Point of Sufficiency does a good job in dividing the data between two sets of countries: those which will still benefit from economic growth, and those which are less certain to. When comparing countries that fall above and below a GDP per capita of $28,000, one can see that these countries are typically developed and developing countries respectively. For reference, the UK has a GDP per capita of around $39,500. My analysis suggests that developed countries that have a GDP per capita above $28,000 benefit little from further economic growth in terms of the population’s well-being, yet still experience many of the potential drawbacks discussed. I would therefore advocate that developed countries redirect their focus from achieving the growth it may bring may not be economic, yet may be of far greater importance. Sources: Happy Planet Index Data, 2012. Available: http://www. happyplanetindex.org/data/. Last accessed 20/12/2014. Oswold, A; Proto, E; Sgroi, D. (2014). Happiness and Productivity. Journal of Labor Economics. Piketty, T (2014). Capital in the Twenty-

paper ‘Happiness and Productivity’. Targeting happiness may in fact improve growth! This would help raise taxation revenue for the government. In the short run to fund the new policies, I would support a reduction in spending on welfare. I feel this would allow developed countries to keep developing, and improve the standard of living of the population. Bhutan, which has a GDP per capita figure of just $2,500, is the first country in the world to actively target ‘gross national happiness’, instead of gross national product. Perhaps the developed world should consider adopting such policy objectives;

First Century. Harvard University Press Stiglitz, J. (2012). The price of inequality. New York: W.W. Norton & Co. Table 1: Human Development Index and its components, 2014. Available: http://hdr.undp.org/ en/content/table-1-human-development-index-andits-components. Last accessed 20/12/2014. Where-to-be-born Index, 2013. Available: http:// en.wikipedia.org/wiki/Where-to-be-born_Index. Last accessed 20/12/2014.

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The Nottingham Economic Review

NHS in Crisis: Where do we go from here? Sophy Rolson (BSc Economics, ‘17, The University of Nottingham)

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ome years ago, Richard Easterlin decided to undertake the not-so-trivial task of answering one of life’s oldest and most important questions: what is the key to happiness? His results may surprise some, who have been conditioned for much of their lives to believe that money can buy you anything, even a happy and satisfying life. This is not the case. One of the most significant factors determining happiness is actually health. Given this, the importance of a strong healthcare system cannot be overstated, and here our country is failing us.

The NHS, the crown jewel of our nation, is spiralling into a deficit it may never claw its way out of. For over sixty years, British citizens have had the peace of mind of knowing that when things went wrong, this establishment would freely and indiscriminately offer them all the help it could. Now it is being propped up by cash injections whilst allowing performance targets to be breached and quality of care to deteriorate. Fears are rising amid warnings that the funding gap will grow as large as £30bn by the year 2020, and more than 2 in 5 people reportedly believe the NHS will cease to be free in the next 20 years. This is because neither budgets nor hard working medical staff can keep up with the huge surge in demand for healthcare caused by a growing, ageing population, higher rates of chronic illnesses, and ever-increasing expectations by the public. In a time when the country is facing austerity measures and a shaky economic recovery, is there anything that can be done to ensure the NHS receives the funding needed to sustain it? The NHS Five Year Forward View was published in October 2014, outlining what changes are needed and how these changes can be achieved. It was devised by experts

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with the best interests of the NHS in mind, rather than political considerations. Simon Stevens, Chief Executive of the NHS, explicitly asked for the political parties to support this plan and requested that the government increase NHS funding by £8bn to reduce the growing funding gap. However, so far there has been a complete failure by the political parties to pledge even close to this level of support. The Conservatives seem more incapable than most at grasping the severity of the situation, having pledged only to maintain

the ringfence around funding. This is what the current government has done over its time in parliament, and it has so far been equivalent to a 0.1% real increase in the budget each year. This means we can expect the additional funding the NHS receives to fall drastically short of the £8bn it needs. The Labour Party offers marginally more hope with their plans to increase funding by £2.5bn, but still no one is willing to commit to Stevens’ plan. Given this, it comes as no surprise that the public has dismally low levels of trust in the leading political parties. A recent survey by Populus found only 47% of voters believe Labour will put the needs of the NHS above their own self-interest, with this falling to 38% for the Conservatives and 35% for the Lib Dems. We can only hope that these pessimistic views are unfounded, and that someone steps

up and shoulders this responsibility before the election in May. Stevens then suggests that the remaining £22bn of the funding gap should be found through efficiency savings. This could be done in two ways, the first of which being to cut unnecessary spending. Anyone who follows the media may immediately recognise several areas in which this could be achieved. One such example is the astonishing redundancy payments that resulted from the recent structural reforms to the NHS. At a time when demand for healthcare was increasing, 38,000 members of staff were made redundant at a total cost of £435m. As if this was not illogical enough, 4,000 of these were later rehired, despite receiving an average of £43,000 each in redundancy payments. The thought of this much taxpayer money being carelessly thrown away is sickening and completely unacceptable at a time when the financial sustainability of the NHS is in question. If further mistakes like this could be avoided it would undoubtedly improve efficiency, and perhaps help to restore faith in political leaders, too. Efficiency savings could also be achieved through investment in areas such as new technology and medical research. Some examples include using genetic patterns to treat some cancers, introducing stem cell based therapy for stroke patients, and developing new imaging techniques that allow for early diagnosis of dementia. This creates an idealistic view of the future, one in which the funding crisis can be avoided not by cutting spending or increasing taxes, but through innovations that in the long term will simultaneously reduce costs and improve the quality of healthcare services. However, in the short term these measures will be costly


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to implement and the effects will take some time to become noticeable. This means that without any immediate additional funding from the government, there is the risk that current budgets will be squeezed further and the quality of healthcare may decline. On top of this, some health economists doubt that it is possible to find as much as £22bn in efficiency savings. One critic claimed the plan was “unlikely, unfeasible and incredible” – a statement that does little to inspire confidence in what may be the NHS’s last hope. The most fundamental problem facing not only the NHS, but health institutions around the world, is how to cope with the building pressure of growing demand. In the UK, rising demand for healthcare is causing costs to increase by 4% annually above inflation, whereas real increases in funding have not come close to matching it. This is the main cause of the current deficits, and it is imperative that it is dealt with before it escalates further. The Five Year Forward View plans to tackle this using prevention measures, in particular by reducing obesity, smoking, and alcohol consumption. All of these put patients at high risk of developing chronic illnesses but could be significantly reduced by adopting healthier lifestyles. Perhaps the most obvious way of encouraging people to avoid these risks is through the use of tax. Economic research has shown that high tax on cigarettes has been extremely effective in reducing consumption, and studies have shown a tax on alcohol would have a similar effect. However, the use of a so-called “fat tax” on sugar, salt and fat could have largely undesirable consequences. This policy was trialled in Denmark, but was blamed for causing inflation to rise to 4.7%, and had a minimal effect on the consumption of unhealthy food as 80% of the population didn’t change their shopping habits at all. Obviously a different approach is needed in tackling obesity, but as the government already has a widespread campaign to raise awareness of health risks, it is uncertain where exactly they should go from here. What is certain is that if demand cannot be greatly reduced, the funding crisis may become a familiar issue. Some may argue that it is time to hand over the NHS to the private sector, believing that profitseeking corporations will be more capable at providing this service. They are sorely mistaken. Despite its flaws, our country’s healthcare system is worth holding on to. In 2014, The Commonwealth Fund ranked the

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NHS first out of 11 healthcare systems, based on its quality, access, efficiency and equity. In comparison, the US spent over double the amount of money per capita on healthcare in the same period but was ranked last. Evidently, private healthcare means paying more for a poorer quality service with greater health inequality. This is what we may face if the funding gap is not filled, and this is why we must fight to make sure that it is.

“In the UK, rising demand for healthcare is causing costs to increase by 4% annually above inflation” The emphasis is on the need for a combined approach: one in which the political parties back the NHS to the best of their ability, the public take control of reducing their own health risks, and NHS England makes the right decisions on where to cut spending and where to increase it. Then we will see a stronger, larger labour force driving our economy, standards of living will rise and, ultimately, we will be closer to reaching Easterlin’s vision of a happy, healthy population. It may be a struggle to get there, but it will be worth it in the end. References:

www.commonwealthfund.org/publications/fundreports/2014/jun/mirror-mirror . Last accessed 8th Dec 2014. Donnelly, L. (2014). New NHS redundancy merrygo-round looms.Available: http://www.telegraph. co.uk/health/healthnews/10998987/New-NHSredundancy-merry-go-round-looms.html . Last accessed 8th Dec 2014. Easterlin, R. (2004). The Economics Happiness. Daedalus. 133 (2), p26-33.

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Harrison, A. (2014). NHS Five Year Forward View: biggest challenge is on funding.  Available: http:// www.theguardian.com/healthcare-network/2014/ oct/23/nhs-five-year-forward-view-challengefunding . Last accessed 8th Dec 2014. Howe, E. (2013). Increasing research and innovation in health and social care. Available: https://www.gov. uk/government/policies/increasing-research-andinnovation-in-health-and-social-care . Last accessed 8th Dec 2014. Hudson, B. (2014).  NHS Five Year Forward View: a shopping list without the prices. Available: http:// www.theguardian.com/healthcare-network/2014/ oct/30/five-year-forward-review-doesnt-provideanswers . Last accessed 8th Dec 2014. NHS England. (2013).  The NHS belongs to the people: a call to action.Available: http://www. england.nhs.uk/2013/07/11/call-to-action/ . Last accessed 8th Dec 2014.

BBC News. (2013). £1.4bn ‘wasted’ on NHS redundancies, says Labour.  Available: http://www. bbc.co.uk/news/uk-politics-23831802. Last accessed 8th Dec 2014.

NHS England. (2014). Five Year Forward View.  Available: http://www.england.nhs.uk/ wp-content/uploads/2014/10/5yfv-web.pdf. Last accessed 8th Dec 2014.

Campbell, D. (2014). NHS needs bigger budget rises to ward off ‘perfect storm’, says watchdog. Available: http://www.theguardian.com/society/2014/oct/20/ nhs-needs-bigger-budget-rises-says-monitor . Last accessed 8th Dec 2014.

NHS England. (2014). The NHS Five Year Forward View.  Available: http://www.england.nhs.uk/ ourwork/futurenhs/ . Last accessed 8th Dec 2014. Pym, H. (2014). A big week for the NHS. Available: http://www.bbc.co.uk/news/health-29692737 . Last accessed 8th Dec 2014.

Campbell, D. (2014). Two in five fear NHS will soon cease to be free.Available: http://www.theguardian. com/society/2014/oct/23/nhs-paid-service-publicfears . Last accessed 8th Dec 2014. Chaloupka, F. (1998).  How Effective are Taxes in Reducing Tobacco Consumption?.  Available: http:// tigger.uic.edu/~fjc/Presentations/Papers/taxes_ consump_rev.pdf . Last accessed 8th Dec 2014. Chivers, T. (2014). Smoking bans and alcohol taxes: do they work?.Available: http://www.telegraph. co.uk/science/11164195/Smoking-bans-andalcohol-taxes-do-they-work.html . Last accessed 8th Dec 2014.

Snowdon, C. (2013). The Proof of the Pudding: Denmark’s fat tax fiasco.  Available: http://www. iea.org.uk/publications/research/the-proof-of-thepudding-denmark%E2%80%99s-fat-tax-fiasco . Last accessed 8th Dec 2014. Triggle, N. (2014). NHS England: King’s Fund says £2bn more needed next year. Available: http://www. bbc.co.uk/news/health-30201023 . Last accessed 8th Dec 2014. Triggle, N. (2014).  NHS winter fears ‘prompt cash boost’.  Available: http://www.bbc.co.uk/news/ health-30038803 . Last accessed 8th Dec 2014. Last accessed 20/12/2014.

Davis, K; Stremikis, K; Squires, D; Schoen, C. (2014). Mirror, Mirror on the Wall, 2014 Update: How the US Health Care System Compares Internationally.  Available: http://

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Debate

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Election Special: Have the Mainstream Political Parties Lost the Student Vote? Adam Williams & Steven Thavendran (BA Economics & Politics, BSc Economics ‘16 & ‘17, The University of Nottingham)

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..he rising influence of former ‘fringe parties’ UKIP and the Green Party has been well publicised over recent months. Statistics reveal that one of the key groups contributing to this has been the student population. This sometimes disregarded demographic has been cited by a new study as having the potential to swing the upcoming general election, making the allegiance of students all the more important this year. In this debate special, we look at the way in which students’ allegiance to the mainstream has changed, and discuss the importance for the representation of alternative parties here at Nottingham. Are students giving their votes to more ‘radical’ political parties? NO: Instead of taking a more pluralistic approach to voting, it seems that students have traditionally voted with a party’s pledge to deal with student tuition fees in mind. This narrow minded view has caused students, since the beginning of the millennium, to vote for parties that explicitly proposed lowering or even removing tuition fees. Previous national elections have provided evidence to suggest that the Liberal Democrats were hugely popular with students largely because of their vow to remove fees altogether, so that more students could afford to go to university. This explained the trend to vote ‘Lib-Dem’ in the 2001, 2005 and 2010 elections. Even though there are partisan views about whether the Liberal Democrats should still be considered a ‘mainstream’ party, after huge drops in voter confidence, it would be fair to say that students over the last decade haven’t changed their political preferences. YES: It is right to say that there was at one point a trend showing how a significant number of students are beginning to vote ‘Lib-Dems’. However, this doesn’t take into consideration that the Liberal Democrats failed to adhere to their promise to completely remove tuition fees. It was this broken promise that contributed to Clegg publically apologising and heavy drops in his popularity

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rating. This has triggered a switch to students starting to support less mainstream parties. Membership amongst the Young Greens has soared, with a 165% increase in membership over the end of last year. The Green party has started to develop a strong following from students. Caroline Lucas, Green Party MP, has particularly gathered support by her belief in universally free education.

“This is a dark day for the future of higher education in this country. The huge hikes in tuition fees, together with the scrapping of Educational Maintenance Allowance and proposed cuts in college funding, amount to nothing less than a Government assault on our young people – and an attack on the principles of universal education. Many people may be priced out of going to university as a result of today’s vote – and those who do go are likely to be saddled with massive debt. This is unacceptable for a society which values social mobility and inclusiveness.” NO: It is right to claim that the Green Party has gained an increase in the number of votes since Nick Clegg embarrassingly retracted his pledge when forming a coalition Government in 2010. However, the increase is not significant enough to assert the bold claim that students are starting to consider less mainstream parties in their decisions when voting. In a survey conducted by the Tab, the top two student parties are, unsurprisingly, the Conservative party and the Labour Party. These parties epitomise the ideas of mainstream politics with both parties being at the forefront of politics for almost a century. Whilst there may be a slight increase in the less mainstream parties such as UKIP

and Green party undoubtedly the political parties representing much of the adult British population will also echo down to the student population of the country. If the question of the debate was whether there was an increased number of students starting to vote for the Green Party the overwhelming evidence would point to yes. However, when considering whether students as a whole are starting to support less mainstream parties, there is no clear answer. Apart from a noticeable increase in Green Party popularity (but still not to a degree where they are leading polls), students are still well in tune with the mainstream parties. A recent Observer poll proved that students heavily disapproved of Nigel Farage and his European pledges with 64% of voters saying they disapproved of him indicating that it is only the Green party that is really making students consider their political allegiance. Should UKIP be allowed to create a society at Nottingham? NO: The tab recently reported how a young group of UKIP supporters studying at the University of Nottingham interrupted a left wing strategy meeting discussing the benefits of blocking the introduction of a Young UKIP branch to the University. ‘Young Independence’, the youth branch of UKIP, has established 18 societies in Universities across the country, notably establishing a stronghold in the Northwest, so why should there not be such a group in Nottingham? The intrusion of the UKIP members to the meeting proves that the conduct of those who may join the society in the University is far from professional. The group tactically hid amongst the audience, only to spring up to start taunting the audience and speakers about their views, eventually jeering at the closing speeches. Whilst reasoned debate is to be encouraged, rudeness and lack of respect for others views is proving that there should not be a UKIP


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society at the University until the would-be members can demonstrate the can take part in reasoned debate. YES: It is not surprising that these young UKIP supporters felt the need to hide their identities in attending the meeting. Without a society at the University, the supporters clearly find it difficult to make their views vocal. It’s a reflection of how the wider population of young has become disillusioned with the mainstream political parties, they need a new vehicle for conveying their frustration and the surge in popularity of UKIP and the Greens is doing that. The University needs to have a Young Independence party, given the same privileges as other parties at the University, to express their views and allow for a reasonable and fair debate between parties. This is all the more important in an election year, especially as young people have a tendency not to vote, representing the student population’s views at a University level can encourage students to become involved in politics and vote at the election. The incident at the meeting does show that the society would need some form of regulation, and a respectful and professional leadership team. A lack of leadership is not a credible argument to prevent a party from being represented at the University. NO: The issue is more so with the policies that UKIP argues for and the culture that it encourages. Last year it was well published how Sanya-Jeet Thandi, a prominent member of Young Independence who had been heralded by UKIP leader, Nigel Farage, as a “rising star”, left the party after claiming it had descended in a “form of racist populism”. The National Union of Students has also denounced UKIP as a “racist, xenophobic, homophobic and sexist organisation”. Add to that the countless number of racial controversies the parent party has been involved in over the last year and we must question if the promotion of such a party is suitable for our University, especially since Nottingham is widely known for its diverse mixture of students and international campuses. Across campus banners describe how Nottingham is “Britain’s Global University”, a promotion of a party that stands for few of our Universities values doesn’t deserve a place here. It’s defiantly clear the level of disillusionment which exists among students with the

Debate

mainstream parties, the tuition fees price hike weighs heavily on many minds, so avenues to argue our alternative views are necessary. But at the same time how would the promotion of a party that may harbour racist views feel to international students who are likely to be the targets for many arguments? YES: But how can students express their opinions if there is immediately a restriction of such views can be. Is University not a place to be able to freely express your views? By blocking, or rather censoring, the ability for a party to represent itself, we are arguably dictating what can and cannot be expressed. Allowing contrasting views to debate against each other must surely be constructive, perhaps, were UKIP to developing into an apparently terrifying racist party, then it could be reasoned with and minds broadened through debate. Yes, debates could take place if UKIP was a small unaffiliated with the University society, but again what gives others the right be a society and not UKIP? If young people’s views are searching for alternatives let them voice these alternatives views, how else can we make progress?

The views of UKIP should be properly represented in recognition of its surging popularity with younger voters I think this issue is much like that of the Green party being included in TV debates. Yes they may have a small following, or their views may differ drastically from the other parties, but not being represented at all at a debate denies audiences the ability to hear their views, a censorship of opinions which could prove to engage with many who are disillusioned. The situation at Nottingham is no different. NO: The party should not be represented in Nottingham, whilst it may have a place at other Universities the policies that it promotes do not fit in with the culture of Nottingham. Yes, it is regrettable that perhaps some students views may not be represented, but the incident at the meeting shows that perhaps these views are best not represented at a University level. It is also hardly welcoming

to international students to be greeted with UKIP campaigners. The party does not need recognition. YES: The views of UKIP should be treated fairly with the views of other parties and as a result, should be properly represented in recognition of its surging popularity with younger voters. By refusing to give the party an equal status as others, students are even less likely to vote or become engaged in politics as they may feel their views are unrepresented. Even if UKIP lacks the support at Nottingham that it gains at other Universities, purely for fairness and to allow for engaging and constructive debate, it deserves a place at the University, regardless of whatever views it may have. Bibliography Burns, Judith. Student vote could swing 2015 election, suggests study. 1 December 2014. 6 January 2015 <http://www.bbc.co.uk/news/ education-30252713>. Cowburn, Ashley. From Ukip to the Green party, the young people looking for an alternative. 1 November 2014. 8 January 2015 <http://www.theguardian. com/society/2014/nov/01/ukip-green-party-youngpeople-alternative>. —. Green party targets students for 2015 election breakthrough. 1 November 2014. <http://www. theguardian.com/politics/2014/nov/01/greenstarget-students-young-people-2015-generalelection>. Green Party. Greens offer free membership to students and young people. 11 December 2010. <http://www.greenparty.org.uk/news/2010-12-09free-membership.html>. Helm, Toby. Young voters shun Nigel Farage and Nick Clegg in general election poll. 27 December 2014. <http://www.theguardian.com/politics/2014/ dec/27/young-voters-shun-ukip-farage-clegg-libdems-general-election>. Johnson, Elliot. UKIP Youth gatecrash anti-UKIP meeting in the Union. 6 November 2014. 8 January 2015 <http://nottingham.tab.co.uk/2014/11/06/ lefties-campaign-to-keep-notts-ukip-free/>. Watt, Nicholas. Prominent British Asian Ukip supporter quits over ‘racist populism’. 13 May 2014. 8 January 2015 <http://www.theguardian.com/ politics/2014/may/13/british-asian-ukip-supporterquits-party-racist-populism-sanya-jeet-thandi>. Wintour, Patrick. Nick Clegg apologises for tuition fees pledge. 20 September 2012. <http://www. theguardian.com/politics/2012/sep/19/nick-cleggapologies-tuition-fees-pledge>.ww.bbc.co.uk/news/ health-30038803 . Last accessed 8th Dec 2014. Last accessed 20/12/2014.

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An Analysis of Income Inequality in the Twenty-First Century Saurabh Tripathi (MSc Economic Development and Policy Analysis, ‘15, The University of Nottingham)

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..he debate on the evolution and future of income inequality is controversial and divisive by nature. On the one end there is Karl Marx, who believed that the scale of private capital accumulation will unquestionably lead to a greater divide between the rich and the poor. Diametrically opposing his views was Nobel Laureate Simon Kuznets, who stressed that technological progress and growth balancing forces would ultimately reduce inequality in the later stages of development. While we do not have conclusive evidence to hail or reject either theory in its entirety, we can be sure that inequality is set to be an issue that will become increasingly central to research within development economics. After all, it was Adam Smith who said in his 1776 magnum opus that “no society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable”. Figure 1: The Kuznets Curve

Inequality threatens the very fabric of the society in which we live. It drives the poor to engage in crime, riots and other disruptive activities (Barro, 2000; Alesina and Perotti, 1996). The resulting civil unrest adversely impacts growth and threatens the stability of political institutions (Barro, 2000). Yet there are differing schools of thought on inequality. While some are of the opinion that financially excluding large masses of the populace can be damaging for growth (Persson and

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Tabellini, 1991; Alesina and Rodrik 1994), others consider some level of inequality necessary to create incentives for growth Figure 2: Income inequality in the US, 19102010 (Source: Piketty, 2014)

concludes with a section on the implications for policy analysis as a result of the findings. Data Description This paper examines a selection of 49 countries from across six continents. Due to the difficult nature of data collection in several countries around Asia and Africa, most datasets are unable to provide data for all countries for the time period in question. Table 1: Principle features of the specified variables

(See table on next page) (Li and Zou, 1998), although “there is very little evidence that inequality is good for growth” (Rodriguez, 2000). Most will agree with the aforementioned papers – that inequality is a societal evil. What about the causes of this massive disparity in income levels? The literature on this segment of the topic yields a zeroconsensus debate. While a few studies show that growth has an increasing effect on inequality, some estimate a diminishing longrun relationship, along the Kuznets Curve. On most other macroeconomic variables, while there is some agreement on their relationship with inequality, there are differing views on the scale of the correlation. Fig. 2 above shows that inequality in the US (and by extension elsewhere in the developed world) was indeed falling between the 1930s and the 1950s, as documented by Kuznets (1955). However, there has been a subsequent rise from under 35% to over 45% in the top decile share in US national income. The aim of this paper is to revisit the Kuznets Curve and test for its relevance in the twenty-first century. The paper analyses the contemporaneous relationship between the various factors and inequality, later checking for consistency over the long run. It then

Empirical Analysis The next stage in the analysis is to construct formal econometric models that will be used to estimate and explain the questions posed in the paper. As stated earlier, one of the prime objectives of this paper is to examine the relationships over two time periods: a contemporaneous period and the long run. Contemporaneous Relationship As the dependent variable INEQ is measured for 2006, to examine the effects of other variables on it contemporaneously, the independent variables will be taken for 2006 as well. Contemporaneous Equation: INEQt = β0 + β1 GDPPCt +β2 GDPPCsqt +β3 AIDt +β4 RESt + β5 OPENt + δ0 AFR + δ1 LATAM + μ Table 2: Contemporaneous Empirical Analysis Note: * p<0.10, ** p<0.05, *** p<0.01 Standard Errors are mentioned in parentheses Given that the equation being estimated is contemporaneous in nature, there could be a strong possibility of reverse causation between the dependent and independent variables. The result of the Breusch-Pagan test in Table 2 indicates that the model does


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Table 1: Classifica(on INEQ

Measure Household Inequality

GDPPC

GDP per  capita

GDPPCsq

GDP per  capita   squared

Defini(on Measured  by  the  Gini  coefficient,  which  is   the  ra9o  of  the  areas  under  the  Lorenz   curve. GDP  is  the  sum  of  gross  value  added  by  all   resident  producers  in  the  economy  plus  any   product  taxes  and  minus  any  subsidies  not   included  in  the  value  of  the  products.  GDP   per  capita  is  the  GDP  divided  by  midyear   popula9on.

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Long-Run Relationship We will now consider the use of a time lag in the model to estimate the impact that the same factors pose on inequality over the long run. It is imperative that we look at this relationship because ‘events’ such as the inflow of foreign aid, or a dramatic fall in trade barriers leading to increased openness can take time in manifesting an impact on inequality. This model further reduces the possibility of reverse causation to a negligible measure, as it is rather unlikely that inequality from 2006 would cast an effect over aid inflows or resource dependence from 2000.

Net Official   Development   Assistance  (ODA)

Net ODA  consists  of  disbursements  of  loans   made  by  the  members  of  the  Development   Assistance  CommiKee,  by  mul9lateral   ins9tu9ons,  and  by  non-­‐DAC  countries  to   promote  economic  development  in   countries  in  the  list  of  ODA  recipients.  This  is   measured  as  a  percentage  of  Gross  Na9onal   Income  (GNI).

Long-Run Equation: INEQt = β0 + β1 GDPPCt-6 +β2 GDPPCsqt-6 +β3 AIDt-6 +β4 RESt-6 + β5 OPENt-6 + δ0 AFR + δ1 LATAM + μ

Sum of  oil  rents,  natural  gas  rents,  coal  rents   (hard  and  soP),  mineral  rents,  and  forest   rents.  Resource  dependence  is  measured  as   a  percentage  of  GDP.

(See next page for table)

Resource Dependence

Openness

Measure of  total  trade,  which  is  the  sum  of   exports  and  imports,  as  a  percentage  of  GDP.

AFR

African Country  

A binary  variable  which  takes  the  value  of  1   for  countries  from  Africa,  else  the  value  of  0.

LATAM

La9n American   Country

A binary  variable  which  takes  the  value  of  1   for  countries  from  La9n  America,  else  the   value  of  0.

AID

RES

OPEN

Table 3: Long-Run Empirical Analysis

Note: * p<0.10, ** p<0.05, *** p<0.01 Standard Errors are mentioned in parentheses The marked fall in the Adjusted R2 from 64% to 59% implies that older values of independent variables explain lesser about the level of income inequality for a given year.

not suffer from heteroscedasticity. The Ramsey RESET test for omitted variables suggests that the model might be missing some important variables, although the overall model explains for over 64% of the variation in income inequality. The first important takeaway from the OLS estimation is the negative coefficient for GDP per capita. This conflicts with the original findings of Simon Kuznets, who laid out the inverted-U hypothesis. The result implies that a $1,000 rise in GDP per capita leads to a fall in the Gini index by 0.3, keeping all other factors constant. An improvement in economic productivity and growth leads to a fall in income inequality contemporaneously. However, the coefficient for GDP per capita squared is positive, although statistically significant only at the 10% level. This trend in fact makes for an anti-Kuznets curve: a U-shaped curve, with inequality initially falling, and later rising as the economy becomes more developed. Further calculations from the dataset reveal that the lowest point on the inequality curve below is achieved around $30,000 GDP per capita mark. A 1% increase in foreign Figure 3: The Anti-Kuznets Curve aid as a proportion of Gross National Income results in a 0.63 rise in the country’s Gini coefficient. One of the main objectives of ODA is to reduce poverty and inequality in lowincome countries, so the result here raises serious questions about the distributive efficacy of foreign aid.

Dependent variable  is     Inequality  (2006)

Expected Sign

GDP Per  Capita  (2006)

+

-­‐0.0003*** (0.0001)

GDP Per  Capita  Squared  (2006)

-­‐

3.28e-­‐09* (1.79e-­‐09)

Aid Inflows  (2006)

+

0.6271** (0.2754)

Resource Dependence  (2006)

+

-­‐0.0228 (0.0737)

Openness (2006)

+

-­‐0.0481*** (0.0134)

(1)

Africa

3.0063 (1.8996)

LaLn America

4.5633** (2.1906)

Constant Term

49.4918*** (1.6758)

ObservaLons

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F-­‐StaLsLc

13.24

Adjusted R-­‐Squared

0.6409

Specifica(on Tests: Breusch-­‐Pagan  test  for   heteroscedasLcity  

0.9971

Ramsey RESET  test  for  omiXed   variables  

0.0430

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The negative coefficient on GDP per capita rises, perhaps unsurprisingly so. A $1,000 rise in the GDP per capita in 2000, led to the Gini coefficient in 2006 to fall by 0.6. Economic growth is a complex, multidimensional variable that is itself affected by several factors. For there to be a considerable impact of income per capita on inequality, a significant time lag would be required, as evidenced in the results from Table 3. This result reinforces that as developing countries become richer, the initial distributional effects are positive. Although as they attain a certain level of economic development, the positive distributional effects fade away, and fewer sections of society retain mass control over the economy. Another significant difference noticed in Table 3 is that the impact of aid falls considerably. Much of the ODA received by developing countries is allocated to social infrastructure such as education and healthcare (OECD, 2012). Investment in such areas bears an inherent lagged effect, as results of a capital infusion into education or healthcare aren’t immediate.

socio-economic shocks. Thomas Piketty in his 2014 bestseller, Capital in the Twenty-First Century, wrote that the decreasing inequality in Kuznets’ dataset “had little to do with the tranquil process of intersectoral mobility that he described”. Piketty (2014) goes on to establish that the Kuznets Curve became as famous as it did primarily because it came as “good news in the midst o f the cold war”, and that “its empirical underpinnings were extremely fragile”. Thomas Piketty’s take on inequality In his book, Piketty analyses that one of the most important explanations of income

effectiveness of aid programmes must be improved by tackling chronic corruption within the bureaucracy more seriously. Countries such as Sweden and Germany have led the way in this regard, circumventing corrupt governments to provide aid directly to the community, improving the immediate and long-run effects on inequality in developing countries. Policymakers should push for controlled liberalisation, ensuring that the value of trade rises alongside the volume; else the distributive effects of openness might become negligible. This can be done by enabling export industries to trade in finished goods as

Figure 4: The world capital/income ratio, 1870-2100 (Source: Piketty, 2014)

opposed to raw materials, thereby generating employment and helping reduce income inequality. China’s involvement in Africa’s natural resources has helped improve the continent’s value of trade over the early 21st century – this could serve as an example. With regards to tackling inequality head-on, the taxation of capital income might work.

Conclusion This section will provide some discussion on policy analysis and a summary of Thomas Piketty’s view on inequality, which he presented in his 2014 book that took economists around the world by storm.

inequality is the historical movement in the Capital/Income ratio. The larger this figure is, the worse income inequality will be. According to his simulations, the value of capital as a percentage of national income is set to close in on 700% by the end of the 21st century.

Was Simon Kuznets too wishful? The reason why 21st century data doesn’t follow the Kuznets Curve is because his hypothesis was based off inadequate and unreliable data from the early 20th century. He acknowledged this, saying that his “paper is perhaps 5 per cent empirical information and 95 per cent speculation, some of it possibly tainted by wishful thinking”.

The book points out that “the private rate of return on capital, r, can be significantly higher for long periods of time than the rate of growth of income and output, g”. When r>g, wealth accumulated in the past grows substantially faster than output and wages. This then harbours disastrous consequences for inequality and social cohesion, raising questions about the efficacy of democracy.

It is interesting to note that Kuznets had no data to account for the increase in inequality over the 19th century. This was an assumption of epic proportions, given how politically powerful his hypothesis went on to become. The decline in inequality of the early 20th century that he spoke of was for the most part attributable to the two world wars and related

Policy Implications Drawing back to the results of this paper’s empirical analysis, it can be noted that foreign aid has a positive correlation with income inequality. Given the primary objectives of ODA, this isn’t a desirable end result. It is however interesting to note that the impact reduces significantly over time. The

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Although if a country indiscriminately taxed capital, it could risk reducing its growth rate further as entrepreneurship would suffer greatly. Piketty’s suggestion of a progressive annual tax on capital might help to “avoid an endless inegalitarian spiral while preserving competition and incentives for new instances of primitive accumulation”. References Alesina, A. and Perotti, R. (1996). Income distribution, political instability, and investment. European Economic Review, 40(6), pp.1203--1228. Alesina, A. and Rodrik, D. (1994). Distributive politics and economic growth.  The Quarterly Journal of Economics, 109(2), pp.465--490. Barro, R. (2000). Inequality and Growth in a Panel of Countries.  Journal of economic growth, 5(1), pp.5-32. Kuznets, S. (1955). Economic growth and income inequality.  The American economic review, pp.1-28. Li, H. and Zou, H. (1998). Income inequality is not


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harmful for growth: theory and evidence. Review of Development Economics, 2(3), pp.318--334. Persson, T. and Tabellini, G. (1991). Is inequality harmful for growth? Theory and evidence.

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Piketty, T (2014). Capital in the Twenty-First Century. London: The Belknap Press of Harvard University Press. p1-185. Rodriguez, F. (2000). Inequality, economic growth

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and economic performance. A Background Note for the World Development Report. Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations.

The Curse of the Black Gold: How Oil Makes Women Worse Off Qureysh Yunus (BSc Economics, ‘15, The University of Nottingham)

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sk any country in the world if they want to be bestowed with oil & gas .abundance and the answer will be yes. Not only would this make it easier for the country to meet domestic demands, they would also have a new resource to export; one that despite being highly volatile in prices generates rents like no other resource in the world. Yet the reality is a complete contrast to the oil dream. Oil has far-reaching consequences in an economy but none more unusual that its effect on women’s welfare. The Dutch Disease Many notable researchers have discussed their take on the natural resource curse. The most famous channel through which it occurs is known as the Dutch Disease, first coined by The Economist to refer to the undesirable phenomenon whereby a country that has oil and gas abundance will export it at the expense of industrialization. There is a crowding out mechanism that occurs since exporting relatively large volumes of oil, which also happens to have relatively high prices, leads to higher exchange rates. Needless to say, a higher exchange rate renders other exporting industries less competitive on the global goods market. For many middle income and poor countries, this sacrificial lamb is the textile and manufacturing sector. So why is this particularly damaging to women? The World Bank found that women make up about 80% of the world’s textile and garments industry. What is interesting is that when oil dominates exports, it comes at the cost of the country’s textile industry. Women lose jobs. Studies show that when it comes to textiles, oil-producing states exported a third of the amount that was exported by non-oil producing states. Coincidence? It appears not. These nations should actually have high volumes of exports in industries with low-cost

jobs since their wages are lower – women even more so than men. What is worse is that these jobs aren’t even being replaced in the oil sector since they employ relatively small amounts of labour, with most of them being expatriates. When the oil industry booms the service sector benefits, which should mean an expansion of jobs for women in the service sector. However, pre-conceived notions of women’s roles prevent them from getting these jobs. According to the World Bank, 14 out of 17 countries in the Middle East place legal restrictions on the type of jobs women can have in order to limit their interaction with their male counterparts. Therefore it should come as no surprise that women cannot get jobs in an industry such as the service sector that requires them to attend to members of the opposite sex.

Maybe it is oil that has prevented them from breaking away from the shackles of outdated religious principles. Civil Wars What are the alternative routes for this ‘disease’ to spread? Many researchers have found a statistical and causational relationship between oil wealth and civil wars. When a country, especially a poor one, starts to drill for oil, that country attracts both local and regional rebel groups. There are mainly two reasons for this. On one hand, rebel groups see oil as a potential source of funding for their military activities. A recent example of this is ISIS in Iraq who have taken over large swathes of land and oil rigs in the northeast. The second reason is a result of the fact that today the majority of oil-producing states are poor, low-income

countries. In these countries, the discovery of oil provides the prospect of a better quality life. However, many of these governments are corrupt and steal the rents from oil. This encourages oil-based violence since citizens are aware that they can gain far greater benefits by joining a rebel group who seek to capture these gains compared to continuously supporting the government. Infuriated citizens are pushed off the edge and towards violence in the promise of a better life. Once again, the shocking truth is that women bear the brunt of this damage. Research has shown that civil wars tend to be more damaging to women’s security. Whilst men undoubtedly suffer during war, it is mostly women who are victims of slavery and sexual violence. A quick look at the data suggests that countries with high rates of political unrest and civil wars, especially in Sub-Saharan Africa, are also those that rank low in the gender equality index. This is further evidence of the suffering of women as an indirect consequence of oil wealth. Democracy The final route through which oil affects women relates to the anti-democratic effects of oil wealth. Governments who nationalise their oil industries – and almost all of them do – do so in order to accrue the large oil rents and make it part of their national budget. This provides a new source of government revenue and reduces the dependency of the government on taxation. Notice how many oil rich countries, especially in the Middle East, have low taxes and a lack of democracy. Why could this be? Political researchers show that by relying less on its citizens’ incomes, governments may feel less pressure to perform. It gives them the liberty to go ahead

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with certain policies because, in essence, the people aren’t paying for it through taxes anymore. This anti-democratization is bad for women mainly because democracies have always been perceived as giving women equal voices and votes. When a nation is democratic, it is less accountable to the gender biased culture and traditions of one autocratic leader and thus gives women better opportunities. Unfortunately, the impact of democracy on women is somewhat foggy. On the one hand, the UK manages to achieve relatively high levels of equality for women despite adopting a democratic system with a monarch which puts one class of individuals above all others. In contrast, Malaysia has a similar democratic system to the UK but lacks equality for women. Interestingly, some research has shown that democracies may not always be better for women. Some may argue this is because democracies are poorly enforced. As an ideal imposed on conquered states over the last 100 years, not all democracies have been cleansed from corruption with many of the original political figures and families still remaining in power. Hence the imposition of democratic institutions and ideology does not fix cultural and religious taboos that perpetuate women’s position in society. Oil or Religion? This brings me to one final consideration. Perhaps it is not oil but religion that causes

women to have lower labour and political participation as well as less gender equality. No region is quite like the Middle East when it comes to the treatment of women. Some have harshly criticized and identified their interpretations of Islam as the root cause of gender inequality. However, let us not forget that many societies and religions were deeply patriarchal in nature. Maybe it is oil that has prevented them from breaking away from the shackles of out-dated religious principles. Islamic states like Tunisia and Morocco have much better gender indexes than other Muslim states. What makes them special? Surprise, surprise... they have no oil. It seems tragic that oil wealth is not all that nations make it out to be. Better leaders and better policies are the answer to improving opportunities and equality for women. But the best policy for each nation depends on several factors such as the country’s income level and their level of economic diversification. The key is to spend petroleum revenues more wisely in investments, and to diversify economies and the petroleum industry so as to not become too dependent on petroleum revenues. Lastly, oil importers have a role to play too by simply being more selective in which nations they purchase oil from. Nevertheless, there is always hope. Oil rich nations and their women are not doomed to the disease. But right now, their symptoms are showing no signs of improvement.

References DiStephano, C. (1997). Integrating Gender into the Political Science Curriculum: Challenges, Pitfalls, and Opportunities. PS: Political Science and Politics, 30(2), 204-206. Iversen, T., & Rosenbluth, F. (2008). Work and power: The connection between female labor force participation and female political representation. Annual Review Political Science, 11, 479-495. Matsuyama, K. (1992). Agricultural Productivity, Comparative Advantage, and Economic Growth. Journal of Economic Theory, 58(December), 317334. Neary, P., Wijnbergen, S. (1986). Natural Resource and the Macroeconomy. Cambridge, Massachusetts: MIT Press. Norris, P. (2011, March). Mecca or oil? Why Arab states lag in gender equality. Paper presented at The Global Cultural Changes Conference, University of California. Nwaogu, I. (2008). Civil Wars in Africa: A Gender Perspective of the Cost on Women. Journal of Social Science, 16(3), 251-258. Ross, M. (2008). Oil, Islam and Women. American Political Science Review, 102(1), 107-123. Ross, M. (2012). The Oil Curse: How Petroleum Wealth Shapes The Development Of Nations. Princeton, New Jersey: Princeton University Press Sachs, J., Warner, A. (1997). Natural Resource Abund

Producers, Politicians, Warriors & Forecasters: Who’s Who in the Oil Market? Carlos A. Medel (MSc in Economics and Econometrics, ‘15, The University of Nottingham)

A Complex Market . here is a wide range of research analysing the oil market beyond the boundaries of Economics. Perhaps, oil uniqueness for the energy matrix of industrialised economies and their remotely located producers, attracts the attention of as many fields with different viewpoints to analyse.

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From an economic point of view, the understanding of any market relies hugely

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on the effect of agent’s behaviour on the equilibrium dynamics. Some specific cases, such as the oil market, would include issues concerning industrial organization, natural resources sustainability, externalities, and other complexities affecting its evolution. In particular, the oil market is characterised as a market with big global players—in the supply and demand side—whose behaviour more than often threaten the world’s production chain and even political and financial stability. Moreover, big players from the supply side

carry the unpleased label of a worldwide recognized cartel (see Griffin and Xiong, 1997; Gulen, 1997; Jones, 1990; and Kaufmann et al., 2004, for details). Big oil producers, i.e. oil exporter countries, have taken a step further on their industrial organisation by creating the Organisation of the Petroleum Exporting Countries (OPEC). Established in Baghdad, Iraq, and effective since January 1961, the main aim of OPEC is “to coordinate and unify the petroleum policies


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of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.” (OPEC, 2012). The organisation includes, as for 2014, twelve countries primarily located in the Middle East and Africa, plus two Latin American members. As an organisation under statutes, each member has to continuously fulfil several requirements concerning production and operations data reporting, plus a full commitment towards OPEC policy mandates. This obviously leads to think of that OPEC acts to? coordinate into setting quotas, prices, or any other market distortion. OPEC’s effective power has been analysed thoroughly from an economic point of view by researches and policy makers. As many and diverse events have occurred since OPEC establishment—mainly wars and political instability—, there is no current consensus about the role of OPEC as price setter. Most remarkably, Almoguera et al. (2011) suggest that the ability of OPEC to set prices since its creation is rather episodic. The authors find that during the period from 1974 until 2004, OPEC acts as Cournot competition when sharing global market with non-OPEC oil producers. Their empirical results, as the authors argue, are in favour of specific but non time-robust price rises due to OPEC compared to the competition price level. From the demand side, it is unlikely that big consumers were trying to confront deliberately the suggested OPEC behaviour. According to energy statistics from CIA World Factbook (2014), the ten major oil consumer countries are: United States, China, Japan, India, Russia, Brazil, Germany, Saudi Arabia, Canada, and South Korea. As the evidence on OPEC’s behaviour is inconclusive, neither of this motley list of countries has been associated specifically against OPEC in a regular basis (yet), despite the United Nations World Trade Organisation (UN-WTO) surveillance for fair trade. So, to what extent OPEC set prices? Is the oil price meeting’s deal? What are the effects of non-market externalities in oil spot price? Are oil price forecasters aware of such externalities when making their predictions? All these questions are certainly important for a broad group of policymakers, from globalbased organisations to specific central bankers fighting imported inflation.

Research

1. Thanks to Ercio Muñoz (Georgetown University) for the provision of the dataset used in López and Muñoz (2012). 2. It is worth mentioning that abstracting from all noneconomic issues, there are two notable researchers that has moving forward the econometrics of oil price: Professors Lutz Kilian (University of Michigan) and James Hamilton (University of California, San Diego). 3. A tasty ingredient has been recently added to this never-ending course. In 11 September 2014, US Secretary of State John Kerry meets Saudi King Abdullah in Jeddah, Saudi Arabia, in which is argued to be a coordination against oil price rises due to Middle East tensions. Moreover, this rise could help Russia to finance few economic sanctions imposed by the US and EU. See The DailyMirror, 31 October, 2014: Oil Politics: The Secret US-Saudi Deal for a review.

Does Sir Clive Granger cause all this? In this article, I provide some answers to these questions by means of econometric data analysis. However, despite all the machinery that has been used in regard to OPEC behaviour, I proceed considering one of the most striking time-series econometrics tools: Granger causality (Granger, 1969).

The oil market is characterised as a market with big global players whose behaviour more than often threaten the world’s production chain and even political and financial stability. The notion of Granger causality is as simple as useful--and different to “ordinary” causality. It states that if lagged values of a variable xt predicts current values of another variable yt, and that forecast includes lags of xt as well as yt, then xt Granger cause yt (xt → yt). Formally, this corresponds to test if all the lags of xt are jointly statistically significant in the following regression: yt = μ + ∑φiyt-1 + ∑θjxt-j + εt, where lags of yt controls for autocorrelation, {μ;φ;θ;σ2} are parameters to be estimated (with, say, ordinary least squares), and εt is a white noise. The autoregressive orders (py,px) can be chosen according to an appropriate model selection criterion such as measures based in the Kullback-Leibler information criterion (i.e. Akaike and Schwarz) or the General-to-Specific (GETS) methodology. Statistical inference is carried out by testing

the joint null hypothesis H₀: θ1=...= θpx= 0 (xt do not Granger cause yt}). The vector that contains the restrictions is F-distributed with (px,T–(py+px+1)) degrees of freedom (T is the sample size). For a simple and rather humorous example on the mechanics of Granger causality, see Thurman and Fisher (1988). Gettin’ jiggy wit’ it By means of Granger causality I provide evidence on the following hypothesis: (NH1) Do geopolitical tensions and announcements (“news”) concerning OPEC countries (labelled GT&N) affect the oil spot price (POil)?, (NH2) Do these tensions affect oil price forecasts (E[POil])?, and (NH3) Do these tensions affect the consensus (ΔPOil) of market analysts forecasts of oil price? It is expected that NH1: GT&N→POil and NH2: GT&N→E[POil]. But, in order to conclude about its reliability, the inverse should not be true for both assumptions. The inverse negative NH1, POil→GT&N, supposes that the current oil price does not drive disturbances in OPEC countries. Also, if the expectations measure do not concern OPEC members, it should be follow that E[POil]→GT&N. But, it is allowed for forecasters to consider actual values of oil price as an indicator of future values. Hence, the following auxiliary hypothesis emerges, ANH: POil→E[POil]. Finally, associated with greater tensions is the uncertainty about future values of oil price. For that reason, it is expected that GT&N→ΔPOil, but the inverse should not hold. Basically, these hypotheses are posed to test if OPEC countries affects oil price, its forecasts, and the consensus surrounding those forecasts. The analysis requires a reliable (and simple) quantitative measure of geopolitical tensions and news measuring unexpected shocks about OPEC countries. Note that I bring forecasters into analysis for a matter of robustness. In order to isolate the pure OPEC announcement effect, I use two measures of the GT&N variable, one containing all what happened with OPEC countries, including political instabilities plus purely OPEC announcements; and a second one excluding the specific OPEC behaviour. 4. Nevertheless, probably this finding does not cause Sir Clive Granger’s fun, as in regard of Granger causality in his Nobel Lecture of 2003 states: “Of course, many ridiculous papers appeared.” (Granger, 2003, p. 366).

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Research

Data The analysis is made considering a time span ranging from 2001.1 until 2012.3 (135 observations); in monthly frequency. The GT&N is constructed by considering the sum of twelve daily variables, each one a dummy variable in which the value of one is assigned to an unexpected event. The events include: UN Oil for Food Program (1995-2003), US relations with Libya and Iran (1996-2004), Iraq War (2003), Iraq post Iraq War (2003-11), Iran post Iraq War (start in 2005), terrorist attacks, Lebanon War (2006), Arab Spring (2011), use of the US Strategic Petroleum Reserve, non-OPEC countries oil-related news, new announcements on discoveries and site exploration, and purely OPEC announcements (see López and Muñoz, 2012, for details). The sources of these variables are Bloomberg, The Wall Street Journal, Financial Times, and the US Energy Information Administration. These twelve variables are added to make a monthly variable which contain an integer with the number of events and news. This variable is not transformed to a binary one to preserve intensity. The oil price (POil) corresponds to the annual percentage change of the Brent oil price, measured in USD per barrel (source: Bloomberg). The expectations (E[POil]) corresponds to the annual percentage change of the 12-months-ahead forecast contained in the monthly Consensus Forecasts (CF) report. The point estimator reported in the CF report corresponds to the mean of the answers ranging 65-70 respondents. Each report also shows the maximum and the minimum point value reported by respondents (E[pHigh] and E[pLow], respectively). Hence, the difference ΔPOil=E12[pHigh–pLow]–E3[pHigh–pLow], where Eo is the forecast at o months, measure the degree in which the consensus is achieved; while greater the uncertainty is, smaller the consensus achieved. Hence, it is expected that GT&N→ΔPOil. Figure 1 exhibits all the variables considered in the analysis: GT&N (in bars), oil price POil, expectations E[POil], and consensus ΔPOil. It is adverted a major number of disturbances during 2001 to mid 2005, and during the 20112 period. Results The results report the outcome of the F test of global significance, comprising only the values θi of Equation 1. In concrete, it tests the null hypothesis H₀:θ₁=...=θpx=0, for each NH1-3

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and ANH given 1 to 4 lags of the xt variable. The lag structure of yt is chosen according to the GETS procedure, allowing skipped terms. The estimations are made with Ordinary Least Squares (OLS).

important commodities worldwide for an incommensurable number of reasons. Large fluctuations of its price are associated with detrimental welfare effects for both producers and consumers.

The results are reported in Table 1. Note that for the first lag, in all cases there is evidence favouring OPEC countries’-related news as an oil price driver, influencing short-term forecasts, and reducing the consensus when unanticipated news are available. The first panel of Table 1 suggests some evidence of OPEC-related disruptions influencing oil prices when 1 and 4 lags of are used, at 10% level of confidence. The unexpectedness of the events comprising the GT&N variable gives the characteristic of short memory behaviour. Hence, what it is important of this finding is that it is significant with one GT&N lag. Moreover, the hypothesis that POil Granger causes disturbances in OPEC countries is utterly rejected.

This article suggests that in order to keep track of price dynamics, it is recommended to get to follow geopolitical tensions and the coordinated actions of the associated major producers. This task is easier said than done, since it relies on non-market signals and other externalities that are not necessarily based on a purely economics-based logic.

The second and third panel are plainly in favour of the OPEC-related behaviour towards expectations revisions and forecast uncertainty. Despite of the results with four lags for NH3, there is evidence supporting these results whilst no evidence was found against. The fourth panel is used a matter of robustness. It states that the current oil price acts as an input for the forecasters, as it naturally should be. But also it reveals that the market does not follow a self-fulfilling price scheme; at least with exogenous forecasts as the CF are. It is most likely, in the light of results, that oil price forecasts coming from OPEC producers could have an implication for future prices; topic left for further advances. What happens when excluding the OPEC behaviour from GT&N variable? Previous results are spoiled (finding bidirectional Granger causality), favouring the hypothesis of purely OPEC news as a price driver. Wrapping up To what extent oil producers and political disturbances in oil exporter countries affect global oil price? By means of Granger causality I provide evidence favouring OPEC countries-related news as an oil price driver, influencing short-term forecasts, and reducing the consensus when unanticipated news are available. These results are important since oil has been long-standing one of the most

References:

Almoguera, PA, CC Douglas, AM Herrera, “Testing for the Cartel in OPEC: Non-cooperative Collusion or just Non-cooperative?,” Oxford Review of Economic Policy 27(1): 144-168. CIA World Factbook, 2014, availbale online at https://yearbook.enerdata.net/. Granger, CWJ, 1969, “Investigating Causal Relations by Econometric Models and Cross-spectral Methods,” Econometrica 37(3): 424-438. Granger, CWJ, 2003, “Time Series Analysis, Cointegration, and Applications,” Nobel Lecture, 8 December 2003, available online at http://www. nobelprize.org/nobel_prizes/economic-sciences/ laureates/2003/ granger-lecture.pdf. Griffin, JM and W Xiong, 1997, “The Incentive to Cheat: An Empirical Analysis of OPEC,” Journal of Law and Economics 40: 289-316. Gulen, SG, 1997, “Is OPEC a Cartel? Evidence from Cointegration and Causality Tests,” The Energy Journal 17(2): 43-57. Jones, CT, 1990, “OPEC Behavior under Falling Prices: Implications for Cartel Stability,” The Energy Journal 11(3): 117-129. Kaufmann, RK, S Dees, P Karadeloglou, and M Sánchez, 2004, “Does OPEC Matter? An Econometric Analysis of Oil Prices,” The Energy Journal 25(4): 67-90. López, E and E Muñoz, 2012, “Oil Price: Geopolitical Tensions and Production Events,” [in Spanish] Working Paper 680, Central Bank of Chile. Organisation of the Petroleum Exporting Countries (OPEC), 2012, OPEC Statute, available online at http://www.opec.org/opec_web/static_files_project/ media/downloads/publications/OPEC_ Statute.pdf. The DailyMirror, 31 October, 2014, “Oil Politics: The Secret US-Saudi Deal,” available online at http:// www.dailymirror.lk/55515/ oil-politics-the-secret-ussaudi-deal. Thurman, WN and ME Fisher, 1988, “Chicken, Eggs, and Causality, or Which Came First?,” American Journal of Agricultural Economics 70(2): 237-238.


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Interview

A Conversation with David Smith Chief Economist for The Times Newspaper

Interviewed by Ben Hodges & Dom Moir (BSc Economics, ‘15 The University of Nottingham)

D

avid Smith is currently Economics .editor at the Sunday Times. He has written several books, his most recent, ‘Free Lunch – Easily Digestible Economics’, is known for appealing to both economists and non-economists, including ‘just one mathematical equation’. He has worked for both The Times and Financial Weekly, as well as at Lloyds Bank and the Henley Centre, before pursuing a career in journalism. He visited The University of Nottingham in December 2014 to give a talk titled ‘After The Crisis: How Britain’s Adjusted And How It Has Not’. Is there anything that you think George Osborne needs to do now to spur on the economy You’ve seen over recent days Osborne the politician at work. We’re now marking the end of Gordon Brown’s career in politics. In terms of what does Osborne want to do, pre-election period… he probably sort of wants to give conservative voters and particularly the people that have deferred to UKIP a good reason for voting conservative again and that will probably mean lower taxes. But that is really very difficult to do given the size of the deficit and given the lack of room for manoeuvre. I think their strategy is more… ‘the economy’s safe with us’. And even in these tough circumstances, even in the world economy that isn’t particularly good for us, in terms of the UK, we can still find ways of getting a little bit more money into the things you want us [Government] to spend on. You wouldn’t expect us to announce big tax cuts. But anything is possible. So do you think that there has been a big focus on next year’s election in terms of recent economic policy? I think that in some ways the electioneering bit has been going all the way through, they [Conservative-Liberal Democrat coalition] decided quite early on that they were going to protect the pensioners. But they’ve had

to exclude the NHS, they’ve had to exclude schools, but they’ve also had to exclude pensioners who are quite a big chunk of the working pension budget, and obviously very important for healthcare and so on. That’s been a constant process. An odd thing we’ve seen in this period of austerity is an increase in personal tax allowance. In

the 80s, when the Tories under Margaret Thatcher implemented austerity, you know that was one of the things they targeted, was to raise everybody’s taxes. They froze the personal allowance at a time of high inflation. This time, its increased - the equivalent of a tax cut. The austerity’s been concentrated in a fairly small area. Local governments have had big cuts. Other departments have had big cuts. It’s been concentrated not right across government or right across the population but its been quite limited in its impact. Your 2010 book ‘The Age of Instability’ considers the issues of the financial crisis and asks how its approach was largely undetected. Do you feel in light of what we now know, economics teaching should change course? Should it be more open to

other ways of thinking, or is there strength in the traditional way of being taught? I think there is strength in the traditional way of being taught. It is the most useful subject you can do because I think it encourages you to think, in a logical way about problems and how to solve problems. Most of the tasks that people are engaged in after being taught economics is not ‘can you predict the next crisis?’, it’s about the sort of thing that businesses are interested in. Like what are the barriers to entry… all that micro stuff that is really very important and interesting. I think on the question of ‘why didn’t economists see it coming?’, there are 3 things. One is that we didn’t engage enough with what was happening in the monetary sector of the economy and in particular the banking sector… and when we did they were always trying to find reasons why something was not dangerous, rather than reasons why it might be. And I think we just trusted the banks, the regulators… we thought that they would be logical and they weren’t. There was illogicality about the whole thing. The Second thing is I firmly believe that if you’d said a month before Lehman Brothers collapsed that this is all going to happen, people would say you’re absolutely bonkers. People on the Internet predict bonkers things all the time. But I do believe it could have gone in a number of ways. After a credit boom there had to be a period of adjustment… it just didn’t need to quite be the one we’ve had. The collapse of Lehman set everything into meltdown and that was a surprise. It didn’t have to be. And I think the final thing is an incompetency by the American government. They thought that the effects of Lehman Brothers could be contained. I think we should think a lot more about behavioural economics and the way people respond to situations. I think we do need to know more about the way banking works, think more about the monetary sector. Behavioural economics is rightly important.

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Features

But I don’t think we should throw the baby out of the bath water and say you know everything we’ve done has been useless and we shouldn’t think like that. I imagine you’ve done quite a lot about the crisis. I think some of that (post crash economics) is trying to take us back to a world of pre-mathematical economics and all those things and again, its no good thinking we could have seen this coming if only we were more descriptive in the way that we do economics. Are you sceptical of the calls for more ‘descriptive’ economic teaching? Occasionally economics has gone wrong by elegant proofs being more important than

the common sense behind them, but I don’t think all the describers in the world would solve that. Economics teaching now is much more sort of ‘real world relevant’ than it was when I was a student. After my first degree I thought I knew everything. I realised all the economics I knew was so theoretical. I think it’s a lot better now. I think some of this stuff about economics being no longer relevant is misplaced. Finally, have you got any advice for aspiring student journalists? Yeah it is difficult, because my career was almost accidental. I started off as an economist, and I’d always wanted to be a

journalist but I was deterred from that. And then when I was working as an economist it so happened that the place I was working used to write a column for a newspaper, and out of that came an opportunity for me to write. So I didn’t go through any conventional routes at all. I think you should always study the subject you’re best at. I think people should think differently about what journalism is now. It’s not going to be forever producing newspapers. Technological change is very apparent. The NER would like to thank David Smith for his time and effort in participating in this interview.

Why the Bank of England is Right to be Pessimistic About the UK Economy Oluyinka Olutola (BSc Economics, ‘16, The University of Nottingham)

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fter the financial crisis of 2008 the UK economy, along with other world .economies has been in and out of recession and on occasion flirted with disaster but indicators point to the economy finally turning a corner. Figures revealed in July 2014 show that, by achieving GDP growth of 0.8% in the second quarter of the year, the UK’s GDP surpassed the pre-crisis level albeit by only a slight increase of 0.2%. Furthermore, with employment falling below 2 million for the first time in six years, standing at 6% of the working population, it seems as though confidence and optimism in the recovery are a given. However, despite the progress the economy has made from where it was in the immediate aftermath of the financial crisis there are still numerous causes for concern in the economy that even the seemingly blemish free economic statistics above can’t paper over. With the Bank of England choosing to extend the period at which they keep the base rate of the economy at a historically low 0.5%, despite the positive economic data, there must be many reasons why the Bank of England is right to be pessimistic about the economy. The fact that the economy is back to precrisis levels is a huge positive and a significant stepping stone in the road to recovery, however further analysis presents another story. The only part of the economy to reach pre-crisis

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levels is the service sector, the growth in this sector has been crucial as it at around 80% of the economy. There are many other sectors of the economy including construction and manufacturing that are yet to reach precrisis levels let alone surpass them. Although growth in consumption lies at 2% above its peak, manufacturing and construction are still 12% lower. These figures serve to exacerbate concerns over the balance of the economy as despite coalition promises of diversifying the economy and building up a manufacturing industry that was once the standard bearer for the world economy, it seems as though the status quo of a service dominated economy is yet to be disturbed. Until the economy shows signs of true diversification and a move away from overreliance on the service sector, which is never a good thing, there is plenty of reason to be pessimistic about the progress of the economy. Impressive employment statistics released in October 2014 seem to confirm the strength of the UK’s recovery. With unemployment falling below 2 million, 6% of the working population this, on the surface, signifies an increased level of confidence in the economy as businesses are increasing their workforces and full employment, where all that are willing and able to work are employed, is within sight. However, this rise in employment is

the slowest rise since March-May 2013. Furthermore, with economic inactivity (people withdrawing from the labour market) increasing by 113,000 in the 3 months leading to August 2014 the initially promising data no longer points to increased confidence in businesses, reflected in them increasing their workforces but rather to a more natural fall in unemployment that doesn’t serve as hard evidence of an economic recovery. This shows that despite some positive economic data the underlying economic recovery is slowing in pace. Furthermore Against this backdrop the Bank of England is right to delay a change in monetary policy as the underlying message from employment figures is that the labour market still hasn’t fully recovered. The fact that nominal wage growth has lagged behind inflation for the last few years is something that continues to hold the UK economy back as the average household has ever falling levels of disposable income. The nominal wage relates to the numerical value of the wage while real wages take inflation, the general rise in prices in the economy, into account. Data from the Office of National Statistics (ONS) shows the progression of real wage growth over the last few years: The graph shows that since the recession hit in 2008 real wages, by and large, have


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been negative with UK households worse hit in March 2009, when the Bank of England first set the historically low base rate of 0.5%. Although real wages have improved significantly from where they were in early 2009 consumers are still nowhere near as well of as they were before the Great Recession since as recently as 2007 real wages increased by over 3% per month. This trend of falling real wages is a crucial reason why the Bank of England has resisted temptation to increase interest rates despite the positive economic data being released in recent months. With people’s real wages falling consumption, the biggest component of economic growth, will struggle to grow sufficiently with the average consumer having less disposable income. Figures show that consumer spending growth between 2014 and 2016 will be around 2% which compares negatively with the average pre-crisis rate of 3.7% Lower real wages combined with relatively lower consumption, when compared with level before the financial crisis, highlights the still significant gap between the state of the UK economy now and where it was before the recession. It’s surely been with this at mind that the Bank of England has decided to extend a period of looser monetary policy by maintaining the base rate at 0.5% to support already squeezed consumers and the still ailing economy. Lastly, the flare up of the Eurozone crisis continues to hold the UK economy back in terms of it achieving long term recovery. With the German economy, the biggest in Europe and the Eurozone, shrinking by 0.2% between

Features

April and June 2014 this has served as more bad news for the UK’s economic outlook. The Eurozone is of huge importance to the health of the UK’s economy as with the European Union it combines to become the UK’s biggest and most important trading partner. The tiny growth in the Eurozone is and will continue to have negative effects on the economy as the UK relies heavily on the European trading

reaching the depths of economic ruin that it did when the economy lay at its most critical level between 2008 and 2009. However, the link between economic variables ranging from employment, wage levels and consumption show that at the heart of the UK economy there’s still vulnerability and despite the fact that we’re in recovery, for the most part the economy is still in a worse shape than it was before 2008. Alongside global economic factors such as the fragile Eurozone economy now wouldn’t be the time for the Bank of England to remove the monetary stabilisers that have helped to see off the darkest days of the recession. In the current state that the economy’s in the Bank of England has to be pessimistic but hopeful that in the medium term the economy will be strong enough to thrive without its accommodative policies. References:

bloc as a destination of exports and also as a source of cheap, high quality imports. Furthermore, the threat of another Eurozone recession would no doubt hit confidence levels in the world economy resulting in flows of investment out of the Eurozone and areas, such as the UK, heavily linked with it. In a climate where the possibility of a collapse of the Eurozone economy is only increasing over time the Bank of England can be supported in its decision to persist in current monetary policy as the outlook from Europe needs nothing to be optimistic about. It can be said, with a reasonable degree of confidence that the UK economy is moving in the right direction and is closer to being back to the level it was before the recession than

http://www.bbc.co.uk/news/business-28479902 http://www.bbc.co.uk/news/business-29627831 http://www.economywatch.com/world_economy/ united-kingdom/?page=full http://www.ft.com/cms/s/0/58b6e5f6-cf78-11e39b2b-00144feabdc0.html#axzz3K8D0tAYa http://www.theguardian.com/business/2014/oct/15/ uk-unemployment-falls-6-percent-lowest-lehmanbrothers http://www.economicshelp.org/blog/6994/ economics/uk-wage-growth/ http://www.bbc.co.uk/news/business-29406079 http://www.bbc.co.uk/news/business-29551541

Why Should Economic Courses be Redefined & How Austrians May Help Mateusz Urban (BSc, ‘15, The University of Nottingham)

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..f we assume those words of Friedrich August von Hayek to be true, then conclusion must inevitably follow: there is a serious problem with the way Economics is ‘done’ and, even more importantly, with the way it is taught. Currently, the latter fails to meet the world-class standards at many top UK

academic institutions. Within many economic departments thinking has been replaced by cramming, questioning economic principles by thoughtless acceptance of textbook theorems, various economic perspectives by the ‘correct’ one. Barely have the matters changed due to the crisis of the so-called

‘mainstream’ Economics, brought about by the unexpected outburst of the recent financial crash (Chakrabortty, 2013). As a result, many UK economic majors has grouped themselves into the fast-growing chain of ‘Post-Crash Economics Societies’ (Inman, 2013). The call for a deep, structural reform of both

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economic syllabuses and teaching methods. As a first step, they propose the inclusion of non-orthodox schools of economic thought into the syllabuses. However, such demands meet with a firm resistance of the economic departments (Cohen and Watson, 2014). An argument, be it among gullible laymen or distinguished academics, is a lifeblood of Economics. Everyone of us once in a while argue about the optimal tax level, results of privatisation of public enterprises or current budget deficit.

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majors are oblivious to loads of insightful and enlightening Economics in favour of the dry and homogenous teachings of the prevailing neo-classical approach (Earle and WardPerkins, 2013). Austrian School, to which I will come back towards the end, serves only as the one of many examples. Students from the Manchester Post-Crash Economics Society in

Many would say that this makes Economics so interesting as a subject of scientific inquiry – very few economic concepts, theories or even views are generally and irrefutably accepted. President Truman is even known to have asked for a ‘one-armed economist’ because he was sick of listening to economists constantly repeating ‘on the one hand this’ and ‘on the other hand that’ (Skousen, 1999). This atmosphere of ambiguity and controversy (fostered even more by the financial crisis) was one of the factors that led me to study Economics at the prestigious University of Nottingham. Even though everything looked fine initially, I felt as if the course, despite being interesting and stimulating, lacked a crucial element. I was not able to identify it at that time, but I knew was connected to the absence of the debates and questioning the material we were taught. Virtually everybody was studying and hardly anybody had any chance to air and confront her views with others. The peculiar nature of Economics seemed to have been lost in between economic theorems and equations.

their recent report on the quality of economic course at the University of Manchester (‘Economics, Education and Unlearning: Economics Education at the University of Manchester’) mention, apart from the Austrian School, institutional, evolutionary, postKeynesian, Marxist, feminist and ecological schools of thought as being ignored in favour of the prevailing, neo-classical approach (PostCrash Economic Society, 2014). The report thoroughly examines various other flaws and imperfections in the process of teaching economics, which seem to be symptomatic to the majority of the UK top economic institutions (Wigstrom, 2011). As some of them are in line with my own experience (even though the situation here is definitely better, there is a considerable ‘common ground’) let me examine them in turn.

What is more, a few months later I realised the scope of the syllabus’ ignorance when I accidentally came across teachings of the socalled Austrian School of Economics, which turned out to be a fully-fledged alternative to the mainstream views. If it had not been for this apparent coincidence, however, I could repeat after one of the distinguished American academics that ‘even though I was an economics major, I was unaware that there was an Austrian school of economics when I was an undergraduate’ (Holcombe, 2014). The issue today is that UK economic

The authors of the report point to the fact that little emphasis is placed on the real-life applications of the economic theory presented during the course of study. They assert, that ‘at best, the implications of the theory are shown to be loosely consistent with a few stylised facts toward the end of the course’ (Post-Crash Economic Society, 2014, p.15). The observation of studying Economics at my home university could to some extent serve as the evidence to support this claim. Indeed, the course material is sometimes technical, abstract and based on non-realistic

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assumptions (vide Microeconomic Theory module). It is safe to say, however, that the state of affairs is considerably better at the University of Nottingham. Furthermore, subjects such as economic history or the history of economic thought seem to be widely marginalized. This definitely fits in line with the aforementioned point on the ignorance of other economic schools and is evenly harmful to the quality of economic teaching. First and foremost, all economic theories were created in a particular historical conditions, and students aware of the latter are better at both understanding and application of those theories. Moreover, due to the virtual lack of economic history modules (both in Manchester and Nottingham there is one module related to those issues) students are deprived of the possibility to gain a wide perspective on the historical economic development, with the past financial crises to the fore. A wise man once said that we cannot understand present while being oblivious to the past, which is the best possible commentary here. Economic is one of the social sciences and is generally treated as such. Nevertheless, the neoclassical methodology (as opposed to Austrian) advocates the use of mathematical and statistical methods in Economics. The procedure can be traced back to Jevons, whose ‘Theory of Political Economy’ is seen as ‘the first rounded exposition of economic principles using the now familiar techniques of algebra’ (Shackle, 1984, p.17). This was supposed to render economics more ‘scientific’ and familiar to the natural sciences (Shackle, 1984, p.2). Leaving aside the discussion on suitability of those techniques in themselves, one must conclude that they gradually replaced other issues like those of ethics, philosophy and politics of economics as a main focus of the Economics. The price of that process is being paid by the contemporary undergraduates, whose horizons in terms of other sciences are becoming more and more narrow (simple experiment: try to find an economic student who knows the meaning of the word ‘epistemology’). In addition, I agree with the


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authors of the report that when conducting economic reasoning it is impossible to avoid value judgments, as social science by definition cannot be completely free of them. The authors state: “Currently value judgments are implicit within the theories we are taught: for example, efficiency and growth are generally presumed to be a good thing. We learn the axioms of utility and we learn how to build a theory from them but we spend little to no time discussing whether utility is an adequate concept of value and welfare. It seems even more absurd that we can have a field entitled ‘welfare economics’ and insist that questions about values are obvious or subsidiary.” (PostCrash Economic Society, 2014, p.18) Again, Economics is not a natural science (contrary to the wishes of many), where one can arrive at objective, irrefutable conclusions and announce them ‘true’. However, the current manner in which Economics is thought may suggest that this is the case and it follows directly from the previous points I made. This, in turn, leads to the situation when students are being penalized for independent and critical thinking and gratified for reproducing module material by rote. Very few economic exam questions require the student to outline and defend his unique view on a particular topic in an argumentative manner. In contrast, many simply demand a mere reproduction of the textbook or lecture material. Let me now come back to the first argument posed against the contemporary shape of economic courses – that of the exclusion of the non-orthodox schools. I am deeply convinced that the teachings of the Austrian School of Economics (one of the main schools until 1930s, gradually marginalized by Keynesians later on), while incorporated into the economic syllabuses, would provide the students with a distinct perspective on various economic phenomena and hence boost the quality of the courses. Beginning with the unique methodology (developed by giant figure of Ludwig von Mises in his monumental ‘Human Action’, in my opinion one of the most insightful economic book written in the XX century), theory of production and heterogeneous capital (created Friedrich von Hayek, who also laid foundations for the Austrian Business Cycle Theory), ending with the non-mainstream theory of money and banking (both Mises and his disciple, Murray Rothbard). That is only a short summary of the main contributions, but I consider it sufficient to visualize the loss we

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incur by ignoring Austrians. Let me refer to simple yet descriptive example. As I noted earlier, mathematical and econometrical approaches are nowadays dominant in the realm of Economics. However, Mises (1949, p.351) asserts that ‘there is no such thing as quantitative economics. All economic quantities we know about are economic history.’ Shand (1984) explains that the Mises’ opposition was based upon subjectivist principles: first, Mises dismissed the habit of treating the facts of economic behaviour (which happened in the past) as if they were similar to those in a laboratory. Second, due to the constantly changing conditions of our behaviour, treating those quantified historical facts as constants seemed impossible to him.

There are numerous issues at UK universities to be solved - never was the need to rethink the structure of economic courses so urgent Consequently, instead of gathering data, running regressions and building models based on unrealistic assumptions, Austrians begin their economics by stating an irrefutable axiom, namely, that every man acts to achieve certain ends (Mises, 1949) and everything logically follows from it. It would be hard to imagine the temperature of the university debate between the advocates of both approaches. It is easier, however, to discern how beneficial would such event be for the academic quality and overall attractiveness of an economic course. Never was the need to rethink the structure of economic courses so urgent. There are numerous issues at the UK universities to be solved, many of which were identified recently by the University of Manchester undergraduates. Not only non-mainstream economic schools (e.g. Austrian or institutional) have to be included in the curriculum, but

also modules such as economic history and philosophy of economics should be considered inseparable and vital part of a world-class economic course. Those could be the first minor steps toward a more thoughtprovoking and challenging economic degree. One that would equip the student with a complete arsenal of tools and perspectives needed to independently analyze the complex economic phenomena. One that would enable him to engage critically in heated discussions and debates on the controversial economic issues. One that would make him aware that contemporary Austrian School has nothing to do with Austria. Recently, I have been dreaming of the Nottingham Post-Crash Economics Society. Indeed, I think it is the one we currently lack most. References

CHAKRABORTTY, A. (2013) Mainstream economics is in denial: the world has changed. Guardian, 28th Oct. Available from: http://www.theguardian.com [Accessed 28/11/14]. COHEN, M. and WATSON, C. (2014) Why UK universities shouldn’t be hostile to alternative economic models. Guardian, 7th Apr. Available from: http://www.theguardian.com [Accessed 28/11/14]. EARLE, J. and WARD-PERKINS, Z. (2013) Economics students need to be taught more than neoclassical theory. Guardian, . Available from: http://www.theguardian.com [Accessed 28/11/14]. HOLCOMBE, R. (2014) Advanced Introduction to the Austrian School of Economics. Northampton, MA, USA: Edward Elgar. MISES, L. VON (1949) Human Action. Yale University Press. POST-CRASH ECONOMICS SOCIETY (2014) Economics, Education and Unlearning: Economics Education at the University of Manchester. [Online]. Available from: http://www.post-crasheconomics. com/economics-education-and-unlearning/ [Accessed 27/11/14] SHAND, A. (1984) The Capitalist Alternative: An Introduction to Neo-Austrian Economics. UK: Harvester Press. SKOUSEN, M. (1999) A One-Armed Economist, Please. Available from: http://www.fee.org [Accessed 29/11/14]. WIGSTROM, C. (2011) A Survey of Undergraduate Economics Programmes in the UK. Institute of New Economic Thinking Curriculum Committee. Available from: http://ineteconomics.org [Accessed 27/11/14]

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Japan: From 1964 to 2020 and Beyond Diana Beltekian (BSc Economics, ‘16, The University of Nottingham)

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.apan is a prime example of a country that has successfully made its transition from a developing country to a fully industrialised economy. This transformation is well represented by Japan’s recent success in winning the bid to host the 2020 Olympic Games. Having previously hosted the 1964 Games, which brought many economic improvements to the economy, similar developments may be expected in the upcoming 2020 Olympics. This opportunity is set to help the economy greatly as Japan is presented with new challenges it must overcome to maintain its key position in the global economy. Japan’s Historic Success 19th century Japan was a weak, agricultural and backward country with a low stock of technology. Dr. Tadao Umesao, a scholar in comparative civilisation, attributes Japan’s industrialisation partially to its geography and its consequent impact on development. Japan is located on the periphery of the Eurasian continent, a distance away from civilisations including China, India and the Middle East. As such, Japanese society was able to assimilate cultural achievements with a reduced risk of annexation than landlocked countries at the centre. Thus, Dr. Umesao asserts this dynamic fusion of national heritage and foreign influences transformed the Japanese economy from a struggling developing country into one of the most developed, high technology economies of today. Dr. Umesao’s theory of Japan’s development is well complemented by Keiji Maegawa of Tsukuba University`s translative adaptation. The idea of translative adaptation states that when a country first joins the global economic system, it should conduct the integration process on terms that are beneficial to itself. In Japan’s history, the Edo period oversaw its reunification and the economy’s closure to foreign trade from 1639 to 1854. However, at the start of the Meiji period, the emperor was restored and Japan reopened its economy; absorbing Western technologies

and developing modern industries to serve the national interest. The 1964 Olympic Games and the Shinkansen In the process of Japan’s development, it entered and won the right to host the 1964 Olympic Games; this opportunity acted as the catalyst for much of the infrastructural improvements that followed since the destruction caused by World War II. During Japan’s modernisation, the Shinkansen, or more commonly known as the bullet train, was constructed. Japan’s unique geography as outlined by Hiroshi Okada (1994) meant that, “the ratio of habitable land to total land area [was] 20%” leading to a high population density in the country’s major cities.

The Shinkansen promotes job creation and regional economic development through the positive externalities newly built stations have on the surrounding economy As non-commercial areas make-up 56% of the 513m Tokaido Shinkansen linking Tokyo and Osaka, regulations limiting the noise vibrations of the Shinkansen were introduced. Noise level regulations have spurred on technological developments aimed to keep noise below 75dB over 86% of the total line. In an effort to meet these regulations the train’s track structure has been improved and interference type barriers developed. These innovations improved Shinkansen operations and through their applications tend to have spill over effects in other industries. Following on from this, the Shinkansen has had positive effects on the external economy both in the short- and long-term. In the short term, the construction of the Shinkansen had spill over effects on the construction industry and in the long term encouraged private expenditure in

areas in close proximity to the newly built lines. Such investments helped develop and keep local economies thriving as evidenced by the urban redevelopment of Kakegawa City in 1988 when the prefecture built a new station for the Tokaido Shinkansen in an effort to invigorate the local economy. After opening the station, there was an upward trend in employment from 96.0% in 1985 to 108.1% in 1992. Production over the same time period rose from 100.1 to 137.6%. Rises in employment have positive multiplier effects on the local economy with the earned labour income reinvested within it. Kakegawa’s geography, located between Tokyo and Osaka, also made it a convenient location for business seminars, especially with the newly built Shinkansen station. This partially contributed to the opening of two city hotels and three business hotels in the area also adding to the local economy’s transactions. Shin-Yokohama station also benefited from the opening of a Shinkansen station in the local area. As passengers increased markedly in the local vicinity from 1986, employment displayed a positive correlation increasing from just below 10,000 employees in 1986 to just over 40,000 by 2006. As illustrated, the Shinkansen promotes job creation and regional economic development through the positive externalities newly built stations have on the surrounding economy. Alongside infrastructure construction both of the railway and consequently in the local economy; rolling stock manufacturing in the medium-term and rail track maintenance in the long-term sees the Shinkansen having prolonged external impacts on Japan’s economy. Similar reinvigorating effects are to be expected in the run up to 2020 Olympics with the Tokyo Metro Co. and Urban Renaissance Agency announcing a new Tokyo Metro station will be constructed on the Hibiya located near the main Olympics sites.

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This should increase the flow of domestic consumers before the Games and during the Olympics with tourists making their way to the Olympics sites in the vicinity of the new station. Thus, this influx of people should rejuvenate the local economy once the station has been completed; the effects are expected to be especially potent during the Games. The impact of the Shinkansen’s construction as well as an expansion of Tokyo’s subway vividly illustrates the importance of an economy’s public transport in supporting the economy at both a local and national level. Japan Today In order to fully appreciate the future impact of the 2020 Olympics on Japan’s economy it is important to examine Japan’s current economic situation. Japan’s economic policy has been following Prime Minister Shinzo Abe’s Abenomics strategy introduced in December 2012. It is set to continue following the three arrow heads pursued by the PM who was successfully re-elected with a majority in the December 14th 2014 election. However, the low election turnout at 52%, having fallen by 7% since the 2012 election, signals low public confidence in Mr Abe’s economic policies. Opponents argue Mr Abe’s re-election was mostly due to the lack of a real political alternative encouraging voter inertia in this snap election. Although there is rising discontent in the public sphere, having secured a two-thirds majority in the lower house of parliament, Prime Minister Abe is set to keep his position until 2018. Moreover, an ongoing ailment of the Japanese economy has been the prolonged deflation lasting for more than a decade. Whilst the yen’s depreciation has alleviated deflationary pressures for a short period with the rise in prices derived from the increase in import prices, this does not constitute sustainable inflation. Stable long term inflation needs wages rising in line with the price level which has yet to occur.

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To add to Japan’s economic woes, the current economic situation has worsened with the economy slipping into recession in the second half of 2014. Commentators have partially attributed the onset of the recession to the hike in consumer tax from 5% to 8% in April 2014 by Mr Abe. Whilst it was used as an effort to control Japan’s outstanding public debt, estimated to be valued at 780 trillion yen at the end of the 2014 fiscal year, it has dampened consumption in the economy only exacerbating the economy ‘s existing problems. The prime minister plans to delay any further increases in the consumer tax to April 2017 when he hopes the economy will be in a better position to bear it.

Lastly, Japan’s ageing population puts strains on the economy’s wellbeing. Starting from the 1950s, Japan’s birth rate has not reached the population-replacement level that keeps population constant. The rising average age in demographic statistics points to an increase in the dependency ratio; fewer of working age supporting the retired population. Statistical forecasts expect Japan’s dependency ratios to increase 10 to 15 years earlier than the U.S and Europe. In 1960 the percentage of the total population aged between 0-14 was 30% whilst by 1995 had fallen to 16% signalling low fertility rates in Japan. Over the same period, 15-64 age range only increased by 7% from 64% in 1960 to 1995. These are worrying statistics with the 65+ age group increasing from 6% in 1960 to 14% of the total population in 1995. Paired with the decline in the youngest age group

that will inevitably need to support the newly retired generations, there will be strains on Japan’s pension and healthcare systems. Tax revenues paid to the government should fall with fewer of working age to pay income tax. This has negative consequences on Japan’s national debt; the largest of all developed countries. In addition, human capital will fall as the elderly, with a wealth of skills and experience, leave the labour force and cannot pass on their knowledge to the younger generations, having a negative impact on Japan’s productivity levels. Japan has its first opportunity to avoid such economic troubles in the form of the 2020 Olympics. The 2020 Olympics and the Japanese Economy Thus, the final question that remains is how the 2020 Olympics can help the Japanese economy in the future and negate the troubles it currently faces. This is best addressed through referring to the past experience of London’s 2012 Olympics Games and making calculated deductions on how the UK’s economy faired. Hosting the 2012 Olympics helped mitigate the effects of the economic dip plaguing the economy through £28 to £41 billion in Gross Value Added (GVA) and adding 618,000 to 893,000 years of employment based on the government’s post games evaluation summary. The Olympics provided employment opportunities helping people find full-time work, receiving skills training and providing them with secure employment. As a result of the Olympics, 62,000 to 76,000 unemployed residents in the capital secured either temporary or permanent employment. Due to Japan’s ageing population, the labour market faces potential labour supply shortages. The ratio of working age to over 65s are set from fall from 2.5 in 2013 1.3 in 2050. Reducing the gender gap in the labour market by 25%, the 2020 Games acting as a possible catalyst, is estimated to increase labour supply by 1.4% and GDP by 0.7%. This presents an opportunity to improve the


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labour market situation and partially delay the rising depending ratio in the run up to and duration of the Olympic Games. The Olympics is a prime opportunity to showcase the economic potential of the host country that can increase economic growth in the long-run. London’s 2012 Olympics first raised inward investment through government expenditure promoting the Games. These positive endorsements influenced companies’ investment decisions, reassuring them the U.K was a thriving economy with an affluent consumer base. By extension, the Olympics helped the U.K access new export markets through Games related contracts. Domestic firms built good business relations with the organisers of the 2016 Rio Games and are expected to secure more than 75,000 contracts for work related to the London Olympics. London’s experience demonstrates that the Olympics are an important confidence builder for Japan which if successfully delivered can encourage firms to relocate to Japan and may increase foreign direct investment (FDI). FDI is especially important as Japan does not have Free Trade Agreements with other countries; instead preferring to settle for Economic Partnership Agreements excluding it from untapped markets. Japan’s export strength has lied in its new innovations. The new maglev technology being developed for the new Linear Motor Shinkansen may prove to be Japan’s latest technology export. The new model hopes to begin operations in 2027. Although this is after the 2020 Games, Japan’s technology has already proven to be in high demand having been exported to Taiwan and China. The 2020 Olympics may prove to be an important turning point in Japan’s economic policy widening Japan’s trade patterns and FDI inflows, increasing GDP and reviving its economy. Finally, simply hosting the Olympic Games is set to increase the tourists visiting the country, in turn having positive multiplier effects on the Japanese economy, as was the case in the UK. 800,000 overseas visitors coming with the purpose of seeing an Olympics event unquestionably benefited the tourism sector. Overall expenditure provided a £600 million net increase for the hosting economy, excluding ticket sales. These sums suggest that Japan should have a similar experience during the Olympic Games and boost seasonal earnings as a resultt A good

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impression should improve Japan’s image as an attractive tourist destination with positive long-term impacts on GDP growth. This can also improve the government’s image in the public eye as it plays a pivotal role in ensuring the successful delivery of the Olympic Games. Strong economic growth should help combat the prolonged deflation the Japanese economy has experienced in the past and put it on the path toward the 2% target of inflation.

Hosting the 2012 Olympics helped mitigate the effects of the economic dip adding 618,000 to 893,000 years of employment based on the government’s post games evaluation summary. Japan undoubtedly faces a multitude of challenges with the economy having slipped into recession causing a greater strain on the economy’s resources and exacerbating existing difficulties. A lack of economic growth does not help combat deflation in the economy nor address the problem of an ageing population. Nevertheless, some respite can be found in Japan’s success in hosting the 2020 Olympics that could bring in a series of economic reforms that address the current problems that may otherwise persist far into the future. This is most evident in the impact of the Shinkansen in facilitating Japan’s economic accomplishments. Given Japan’s previous achievements, it is not just mere optimism to say that it can overcome these challenges. References

BBC News. (2014) ‘Japan election: Voters back Shinzo Abe as PM wins new term’ [Online], available from: [http://www.bbc.com/news/worldasia-30444230] Butkiewicz, L. (prepared report) (2012) ‘Implications of Japan’s Changing Demographics’, The National Bureau of Asian Research, available from: [http:// www.nbr.org/research/activity.aspx?id=304] Fujii, N. (2013) ‘An Overview of Japan’s HighSpeed Railway: Shinkansen’ Railway Bureau, MLIT, available from: [http://www.jterc.or.jp/ english/kokusai/conferences/pdf/130211-mlitpresentation.pdf]

Inagaki, K. (2014) ‘Japan’s bullet train celebrates its 50th birthday’ [Online] The Financial Times, available from: [http://www.ft.com/intl/cms/ s/0/8ed0f124-4960-11e4-8d68-00144feab7de. html#axzz3MOxPQtBE] Kyodo, J. (2014) ‘Hibiya line to get station before Olympics,’ [Online] The Japan Times, available from: [http://www.japantimes.co.jp/ news/2014/10/15/national/hibiya-line-get-newstation-olympics/#.VJAymCuUd8E] McCurry, J. (2014) ‘Japanese PM Shinzo Abe tightens grip on power with election victory’ [Online] The Guardian, available from: [http://www. theguardian.com/world/2014/dec/14/japan-shinzoabe-election] McMorrow, K., and Roeger, W. [no date] ‘The Economic Consequences of Ageing Populations: A Comparison of the EU, US and Japan’, available from: [http://ec.europa.eu/economy_finance/ publications/publication11151_en.pdf] Ministry of Finance Japan. [no date] ‘How big is Japan’s debt?’ available from: [http://www.mof. go.jp/english/gallery/201407e.htm] OECD Employment Outlook. (2014) ‘How does Japan compare?’ OECD, available from: [http:// www.oecd.org/japan/EMO-JPN-EN.pdf] Ohno, K. (2006) ‘Economic Development of Japan` The Path Traveled By Japan as a Developing Country, GRIPS Development Forum, available from: [http://www.grips.ac.jp/forum/pdf06/EDJ.pdf] Okada, H. (1994) ‘Features and Economic and Social Effects of the Shinkansen’, Japan Railway and Transport Review, available from [http://www. jrtr.net/jrtr03/pdf/f09_oka.pdf] Tanaka, Y. [no date] ‘Regional Development through High Speed Rail Project’, Japan International Transport Institute, available from: [http://www. japantransport.com/seminar/ITPS0111.pdf] Thornton, G. (2013) ‘Report 5: Post-Games Evaluation, Summary Report’, Department for Culture, Media & Sport, available from: [https:// www.gov.uk/government/uploads/system/uploads/ attachment_data/file/224181/1188-B_Meta_ Evaluation.pdf] Ujikane, K. (2014) ‘Unlocking Japan Growth Potential Is Task for Abenomics 2.0’ [Online] Bloomberg, available from: [http://www.bloomberg. com/news/2014-12-15/unlocking-japan-growthpotential-looms-as-task-for-abenomics-2-0.html] Willson, B. (2012) ‘London 2012: UK firms ‘must match the Australians’ [Online] BBC News, available from: [http://www.bbc.com/news/ business-18782973]

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Rethinking the Command Economy Faiyaz Amin (BSc Economics & Politics, ‘15, The University of Nottingham)

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..he idea of a command economy is not a unique one, nor is it often considered the most sensible or efficient organisation of an economy in our current day and age. Indeed, past experiences would seem to indicate the triumph of the free market, and the total abandonment of the command system. The once hard-line communist state apparatuses, flagships of the command system, are now either gone, such as the USSR, or reformed to the point of completely being unrecognisable, such as China or Vietnam. Indeed, the few contemporary examples left of the command economy are Cuba and North Korea; hardly great sponsors for a system that was once so prevalent just a few decades before, considering their ailing economies and questionable domestic policies. Despite these misgivings it is important not to jump to conclusions about the system, but to instead consider both what went wrong and how this can be corrected. The end of the Cold War ushered in a new age of liberal capitalism, but does this really spell the end of the command economy? Many would argue yes. It had been tried and tested in a variety of different nations, big and small, and would suggest empirically that such a model was unfit for use by anyone. In fact, this may very well be the case: the model may be unsuitable. But it may very well also be that the model was simply implemented badly or wrongly. Democracy once existed in Ancient Greece, but it took more than two thousand years for it to re-emerge as the most widelyaccepted system for national governance. It is clearly evident that initially the idea of democracy was implemented “wrongly” with the Ancient Greeks, since only Greek “citizens” could vote, but this completely excluded slaves, women, and foreigners; the majority of the population, in fact. One could also argue that with such a large uneducated population, the circumstances for democracy at the time were simply not favourable. Regardless, it took many years for scholars, intellectuals and finally the general population to appreciate the virtues of democracy. In a similar vein of thought, perhaps our world is not yet ready for a command economy?

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Karl Marx held the view that society progressed through historical stages that culminated in communism. He believed that society evolved through a dialectical process of ‘historical materialism,’ in which changes in material forces, namely productive forces, would determine the make up of society as a whole. In this way, he believed that discoveries and improvements in technology that sparked the industrial age, for example, also directly caused a shift from aristocratic feudal societies to middle-class oriented capitalist ones. No doubt his work was a reflection of the world in which he lived, a world of naked capitalism and the horrors that were associated with it at the time: slavery, child labour and non-existent worker’s rights. However, it was his firm belief, and the belief of many other scholars, that capitalism could not sustain and would eventually implode. Capitalist society would transition into a socialist one.

Capitalism contains many internal contradictions that can only be observed once capitalism has been realised. This transition in fact, may hold the key as to answering why so many of the command economies of the 20th century had failed. This is because almost all of them were not already capitalist states ready for a transformation. In fact, these states were almost all exclusively feudal states. The transition transpired prematurely, not because Marx predicted it should, but because the idea of socialism at the time, with its promises of equality and shared prosperity, appealed to the largely uneducated, poor, rural masses: the peasants rather than the proletariat. If anything, Marx’s work was made too early, instigating an early emotional response rather than allowing his theorized scientific process to play out. It was indeed this set of unfortunate circumstances that gave rise to the oppressive, dictatorial communist regimes that spanned the globe.

The problem was that these nations simply did not have the prerequisites for a commandstyle economy as espoused by communism, and in order for power to be consolidated at the highest levels of government, these nations began to implement policies dedicated to eradicating the bourgeoisie before they had even emerged. In the long run, however, this has proved detrimental. The brutality of these regimes led to their own inevitable demise, causing the very notion of communism and by extension a command-style economy, to be almost inexorably pinned to the idea of a ruthless, authoritarian state. So what are the prerequisites for a command economy to emerge? In fact, arguably, the full development of capitalism pre-necessitates any form of transition to socialism. The reason is simple: as pointed out by Marx, capitalism contains many internal contradictions that can only be observed once capitalism has been realised. Various movements have sprung up to “correct” these, even the most mundane, can often be linked to changes instigated by a capitalist mode of production. The clearest is the issue of environment. For all the growth we have achieved, and for the all the products and choice the consumer now has at his disposal due to capitalism, it is now evident that there are simply not enough materials to sustain this. Deforestation has led to the destruction of homes, both natural and human; carbon emissions have led to hazardous levels of pollution in many urban environments, as well as contributing to global warming; overpopulation has led to higher costs of living and an increasingly negative impact on the environment. Left to a free market, many of these situations would most probably deteriorate further, as producers and consumers alike are alienated from the true consequences of their actions; the amount of coal needed to fuel their homes and it’s impact on the environment, the addition to living costs, for both household and economy, having another child might have, to name a few examples, and the reason that this is the case is because capitalism provides for individual


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needs, but has no mechanism to aggregate and tend to the needs of society, since these are often in contrast with each other. This is often the justification for regulation. So why would the development of capitalism be important for the creation of a command economy? The creative power of capitalism is unmatched, however unsustainable, and it is this fact that is inevitably so important for a command economy. The development of technology, particularly the internet, has removed barriers and borders between people. It is now possible to communicate almost instantaneously, and transport has developed to the extent where one can travel to the other side of the world in just a day. Methods of developing sustainable energy also provide us with the possibility of near-infinite amounts of energy at low costs. Meanwhile, the development of machines and robots have sent many people into unemployment, as they offer a much cheaper and more reliable alternative to labour. The growth of machinery coupled with the growth of productive capacity should eventually lead to the dwindling of costs for many goods and services. For the central

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planner, new technology therefore provides much more efficient ways of measuring what to produce, how to produce, and for whom to produce, whilst also being able to effectively assess a key fourth factor, the social impact of producing. The more difficult question invariably would be how to set up such a system. With hindsight, in the failures of the USSR and communist China, it is important to note that for a command system to work, it cannot rely solely on improving technology and information, but also on input from good, competent central planners as well. The top-down, bureaucratic style of the aforementioned regimes, as well as countless other historical examples, serve as a reminder that this system – in its previous form - is best left in history. Perhaps improvements could be made if the government itself is treated as a business; in the same way that a business may suffer from extra costs and diseconomies of scale in trying to overextend, so too did the highly centralised command economies of the past try to overextend their hold on all facets of the economy. What is required is a bottom-up system, one with a

bureaucracy that serves mainly as a guiding and regulatory force, rather than a controlling arm. A system of localised, directly elected and accountable planning agencies would most probably be a good way of implementing a command economy, with money being approved by another higher elected body to minimise wastage. While this article is by no means an endorsement of communism, or even a mere promotion of a command economy, its purpose is simply to highlight that a command economy may not be as naïve and inefficient as previously thought. The availability of better information, thanks almost exclusively to the development of technology, which itself is a consequence of capitalism, has meant we can more effectively determine both consumer preferences and needs, and thus allocate misplaced resources accordingly. However, it may well yet be a long time before technology develops to such an extent needed. Nevertheless, one might expect the future return of the command economy to be a very real possibility.

Tipped Off Ben Hodges (BSc Economics, ‘15, The University of Nottingham)

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..n 2013 a total of around $40bn was given in voluntary tips to service workers in the USA – double NASA’s national budget (Dubner and Levitt, 2013). From waiters to manicure specialists, 31 different professions exist for which American society actively encourages its customers to tip. With many states only requiring restaurant workers to be paid $2.13/hr, many depend heavily on gratuity payments. While most of their European counterparts benefit from higher minimum wages, the concept of tipping is an established norm in several countries. Conventional economic thinking states that consumers act rationally when making spending decisions. We buy goods and services to maximise our welfare while minimising our costs. Yet when we leave a tip we voluntarily choose to increase our costs for no obvious extra gain; after all, gratuity payments are given once a service has already been provided. Given the scale and normality

of gratuity payments within many Western societies, its interaction with economic theory is a concept worthy of discussion. Perhaps the assumption that leaving a tip doesn’t offer material gain is unfounded; tips encourage workers to offer a high quality service. Even though tips are given after the transaction is complete, all that’s required is an implicit understanding that good service is rewarded. In the same way that performance related bonuses aim to align management incentives with those of a company’s shareholders, tipping might provide a similar mechanism for service workers. Even in recognition of this, it still appears tipping is at odds with economic theory. If this ‘implicit understanding’ exists, a single consumer would benefit from quality service regardless of how they tip. They would save money by leaving nothing, and one individual’s actions would certainly be unable to jeopardise

the cultural norm for next time (except when returning to the same restaurant!) A useful explanation can be found in studies which have looked at why people donate to charity, a concept which can also pose difficulties for economic theory. Insights from experimental and behavioural economics, which consider the importance of psychology in understanding economic decision making, are important. In many cases people give to charity, not just because they care about the cause, but because they enjoy the feeling they get from donating – a feeling which is enhanced when others are made aware of their donation. One natural field experiment found that contributions made in front of a solicitor were 25% higher than those made in private (Alpizar et al, 2013). Indeed the 2011 UK Government report ‘Applying behavioural insights to charitable giving,’ utilises a key insight from the literature: “we are more likely to give to charity if it is the social norm.” In

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increasing donations they advise “making acts of giving more visible to others within one’s social group.” The similarities with tipping are clear.

in order to avoid embarrassing unintended displays of selfishness (the average restaurant tip in New York is 19.1% but just 11.8% in London (Zagat, 2012).)

How does this link help explain tipping within the frameworks of economic theory? For many of the same reasons people donate to charity, tipping could be considered a perfectly rational activity given the framework and norms of the society it exists within. This is because the non-monetary satisfaction gained by complying with social norms may be greater than the monetary loss incurred through paying the tip. Human emotions (embarrassment, awkwardness?) act as irritatingly strong enforcers.

It is hard to identify such a distorted process as one based upon rational decision making. Nevertheless perhaps this isn’t important: if service providers at least perceive hard work to reap high tips, tipping may still induce good

Rational or not, in a restaurant you would expect customers to tip hard working servers more highly than those who shirk. Several research papers question this assumption. One of the prevailing findings is that service quality is often not an important component of tip decision making. In fact, one study found that just 4% of the variability in differences in percentage tip size was explained by service ratings (Lynn and McCall, 2013). What of the remainder? In American restaurants, customers are more likely to tip servers of the opposite sex more highly. For male customers, attractive waitresses receive higher tips; for female customers, appearance is not so important. Generally, blonde women get higher tips than brunettes, and giving away sweets with the bill has been shown to increase tip size. The same applies for drawing smiley faces (or suns) on the bill and touching customers on the shoulder. In one study the server received an extra dollar tip per table when squatting down next to customers. Confounding this: why does the hotel bartender receive a tip yet not the receptionist? Should you tip taxi drivers? Does this depend on the city you are in or the distance you travel? Indeed regional differences in tipping customs mean that when travelling to different countries it’s often necessary to research local norms

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normal. There are fairer, more effective ways to incentivise and reward workers. To see how this can be achieved effectively, one just has to consider how countries’ approaches differ. Compared to the US, the UK has 10 fewer professions that receive tips; in Sweden it is normal for only 7 professions to be tipped. In Iceland the number falls to 0, where it is considered disrespectful, and in Singapore tipping is illegal (Zinkhan et al, 1993). Such variation indicates the importance of cultural differences; behavioural and psychological factors play a large role in upholding tipping. More importantly, it shows us that tipping does not have to be a part of modern life – many countries have already found answers to this long overdue problem. References Dubner, S.J. and Levit, S. (2013), ‘Should tipping be banned?’

service. Indeed, maybe this very discussion is over-analysing an activity that is nothing other than a display of gratitude. Worryingly evidence suggests that tipping may actually present far greater concerns than being an imperfect allocation of resources. Studies find that, in American restaurants, “consumers of both races discriminated against Black service providers by tipping them less than White service providers” (even after controlling for perceptions of quality and other factors) (Lynn et al, 2008). This finding is made worse when we consider that in the USA restaurant worker wages are legally allowed to be much lower than other professions. Furthermore, a positive correlation between the prevalence of tipping within a country and its level of corruption has been found (Torfason et al, 2013). Perhaps a culture which encourages tipping normalises the act of giving informal payments such that they spread into illegitimate territory. It is this writer’s view that tipping is inefficient and discriminatory. Even if the rationality of the motives behind tipping can be explained by social norms, I argue that this is no justification for its existence. Many things that are now illegal were once considered socially

Behavioural Insights team for UK Govt. (2013), ‘Applying behavioural insights to charitable giving.’ Alpizar, F., Carlsson, F. and JohanssonStenman, O. (2008), ‘Anonymity, reciprocity, and conformity: Evidence from voluntary contributions to a national park in Costa Rica.’ Lynn, M. and McCall, M. (2013), ‘Gratitude and gratuity: a meta-analysis of research on the service-tipping relationship.’ Zagat. (2012), Survey Data Lynn, M., Sturman, M., Ganley, C., Adams, E., Douglas, M. and McNeil, J. (2008), ‘Consumer Racial Discrimination in Tipping: A Replication and Extension.’ Torfason, M.T., Flynn, F.J. and Kupor, D. (2013), ‘Here’s a Tip: Prosocial Gratuities Are Linked to Corruption.’ Zinkhan, G.M., Lynn, M. and Harris, J. (1993), ‘Consumer Tipping: A Cross-Country Study.’


The Nottingham Economic Review

Interview

A Conversation with Ian Stewart Deloitte Chief Economist

Interviewed by James Longman & Apoorva Bihani BSc Economics, ‘15 & ‘16, The University of Nottingham)

I

. an Stewart is Deloitte’s Chief Economist in London in which role he advises corporate clients on macroeconomics and financial markets developments. Ian devised and runs Deloitte’s quarterly survey of Chief Financial Officers, writes a weekly briefing on economics and comments on the economic scene in the media.

recovery has good momentum so, the labour market has strengthened appreciably. Real incomes, which have been negative for seven years, have been contracting, are starting to turn positive, so inflation is coming down and wages are going up, and the Bank of England now has the reason for keeping interest rates lower so I think – all those

Before joining Deloitte Ian spent 12 years as Chief Economist for Europe at the US investment bank, Merrill Lynch in London. He previously worked as Special Adviser to the Secretary of State for Social Security, the Rt Hon Tony Newton, as Head of Economics in the Conservative Party’s Research Department and as an economist with the Confederation of British Industry in London. Ian’s presentation in the Nottingham Business School on 14th November 2014 was titled, ‘Is the Global Recovery on Track?’, which addressed the return of geopolitical risk along with performance of the US, UK, Euro area economy and emerging markets and their impact on global recovery. How do you think the UK is going to be affected by a stagnating Eurozone economy? It’s a good question. I’m relatively sanguine, firstly because I think that the Euro area will see a weak recovery in activity next year, and that’s partly because inflation is coming down in Europe and because monetary policy remains highly accommodative, partly just because growth has been so weak in Europe for the last two years and I think you will see some sort of a strengthening. Also, I think the chances are the European Central Bank will probably provide additional stimulus to the Euro area economy through monetary policy. At the same time, I think that the UK domestic

factors to me mean that what you’ll probably see is a modest slowdown in activity next year in the UK, coupled with a very weak recovery in the Euro area. The area of the UK economy that will be affected will be exports, and in particular manufacturing. We can already see an effect on business confidence, so I wouldn’t be hugely optimistic about the external side. But on balance I mean I’m reasonably optimistic the UK will see a soft landing in terms of growth next year. Considering that growth is slowing down in emerging economies, especially in Brazil and Russia, how do you think that will affect investment and trade with these markets? Well, it’s undoubtedly the case that

sentiment about these markets has changed and long term growth prospects – so for instance embodied in IMF forecasts – long term growth, growth prospects, have deteriorated. That said, I mean in the work that we do talking to corporates, if you ask corporate big companies in the West where they see marginal growth in the global economy, they will almost always say in emerging markets. These companies are making investment decisions over, for a very long time period, so although sentiment has turned more negative, I think that you are going to see continued growth in capital flows to emerging markets. Actually, I think that it’s also a two-way process, and I think one of the other factors is the increase in Chinese ownership of foreign assets, which I think is going to be very strong over the coming years. So, we will see the Chinese playing a much more prominent role in the global economy in terms of its ownership of assets. But I think what is undoubtedly the case is that the kind of euphoria over emerging markets which has been a sort of hallmark of thinking on the global economy for the last several years, I think that has been tempered down somewhat. What, according to you, will be the biggest impact of the ISIS conflict going on in the Middle East right now on the global economy? Well I think it’s likely to have a fairly small impact actually. One of the striking features about the global economy and the advanced economies is the sort of external political shocks or natural disasters or terrorist incidents tend to have a very short-lived effect on growth other than in the very short term. So if you look at episodes like the Kobe earthquake in Japan in 1995, or you look at the attack on the World Trade Centre, these were

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Interview

massive events whose economic impact on a one-year view was really very small. So I don’t think this is going to have a material impact on global growth, although things that can have a small economic impact can have huge political impact. I think it’s important to disentangle the two. Clearly the rise of ISIS is geopolitically an enormous new factor in Middle Eastern politics, but I don’t think that necessarily means that it’s a game changer for global growth. I think, actually, that’s a caveat – so perhaps the most surprising thing about not only ISIS but also the Gaza conflict is that neither of those events have had any perceptible effect on oil prices, which has been one of the traditional channels by which tension in the Middle East transmits itself to the Western world. Just leading on from that, you don’t think that there’s going to be any effect on oil prices with the ISIS conflict? Well what’s interesting is that the arrival of ISIS on the scene over the summer, which I think is a massive shock and unexpected in the West, has been accompanied by the oil price falling to its lowest level in 5 years – below $80 a barrel. I think that may partly be because the monopoly power of OPEC has been eroded by the growth of fracking in the United States. There are suggestions, too, that Saudi Arabia has continued to pump oil and that there may be geopolitical considerations for Saudi in maintaining a lower oil price in terms of undermining both Russia and Iran – I wouldn’t have a view on that. But what is striking is that this chaos in the Middle East has been accompanied by extraordinarily low oil prices, and that shows no sign of changing. Yeah, one of the questions I actually had was finally Saudi Arabia […] the Saudi oil minister. In the FTO I read the other day that he said that it was nothing political and it was purely market forces. Having said that, do you think that they are doing so to undercut the US on shale oil? Well it’s interesting, there are two competing theories, aren’t there? There’s one that the

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Saudis are trying to undercut the US on shale oil and make shale oil less viable. There’s an alternative theory that Saudi Arabia and America may have a shared interest in a lower oil price because of the adverse effect

it has on Russia and Iran. We can speculate about the motives, but I think what is clear is that the oil price is very low and that has had a pronounced effect on prospects for Russian growth at a time when Russia is arguably seen as a greater threat to the West than at any time in 25 years, since the collapse of the Soviet Union. So whether by design or by accident, you could say that a low oil price is beneficial to the West both in terms of raising real incomes but also in terms of dampening growth prospects in Russia. What do you think the impact of quantitative easing has been on the UK and the US, and further to that, do you think that the world economy has to some extent become dependent on it? Well I think that quantitative easing has operated by keeping money – capital – cheap and plentiful, and by inflating the price of risk assets such as equities in high yielding bonds and houses. Those effects have served to bolster growth, and there’s clearly a debate about the extent to which they have affected growth. My own view is that quantitative easing has played a significant role in helping drive the recovery. I think America’s recovery

is probably sustainable without quantitative easing – that’s clearly the view of the Federal Reserve because it’s ended its programme of quantitative easing. The Bank of England is less confident and it hasn’t officially – it is no longer buying bonds but it hasn’t said it won’t at some stage in the future buy bonds. But I’m optimistic that growth can continue without quantitative easing, at least in economies where you have strong domestic demand and balance sheets, particularly in the financial sector, have been strengthened. I think there is greater uncertainty about whether quantitative easing will be able to be withdrawn in a sufficiently timely fashion to avoid inflation picking up, and that is perhaps the big risk in the global economy – or one of the big risks in the global economy further down the line. I almost saw it as coincidence perhaps that the Bank of Japan decided to start their program 48 hours […] the Fed’s October meeting being announced. Is that coincidence? I mean, Japan has a different problem with – you know; they’re really close to zero lower bounds They are, and they already have a massive program of quantitative easing and they have increased it by 70% with these latest measures, and clearly what they’re seeking to engineer is a devaluation of the yen, which they’ve had – the yen has fallen by about 30% in the last two years. They’ve had a dramatic effect on asset prices. I think the real question for Japan is whether there will then be the follow through in terms of stimulating risk appetite and driving corporate activity both in terms of hiring and investment, and those things have been seen in the United Kingdom and in the United States. Japan is economically appears to be more dysfunctional and has much longer running problems than the US and the UK, so we’ll have to see, but I think they are making a sensible bet on quantitative easing, and taking the view that, you know, if the medicine isn’t working then they should take more of it.


The Nottingham Economic Review

Interview

wealth taxes. Finally, there’s been a continuing trend of wealth inequality, especially in the US. How can we best tackle this problem given that there are arguments that inequality is stifling our growth? Yes, I think there are perhaps two approaches. One is a redistributive approach which might rely on the tax system, minimum wage, a minimum income guarantee, or benefits targeted at low income families; so there’s a redistributive approach, which I suppose tends to be favoured by those on the centreleft, and obviously that could involve higher taxes of very high earners and in particular

There’s an alternative approach which isn’t mutually exclusive which says that the problem of inequality reflects, in part at least, the high returns to human capital in modern economies and that inequality has been exacerbated by globalisation and the rise of technology and premium attached to high skilled workers. The solution lies in education and training, so you actually raise the market value of lower paid workers, because clearly there is a risk that aggressive redistributive policies could hamper the wealth-creating capacity

of the wider economy, and that became quite a widespread view in the 80s and 90s in the West. So I would tend to favour measures that improve skills and education and training rather than an aggressive form of redistribution. And I do agree with you that actually inequality is now a significant economic as well as political issue, so I think it is something which warrants the concern and attention of policy makers. The NER would like to thank Ian Stewart for his time and effort in participating in this interview.

The NER would like to thank Charles Clarke, David Smith, Ian Stewart, Daniele Nosenzo & Professor Wyn Morgan for their time and contribution

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