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ISSUE 14 SEPTEMBER 2014

Up For Grabs?

INSIDE THIS ISSUE

Interviews with Evan Davis and Tim Harford

The Economics of Terrorism

How Africa can learn from Europe & the Eurozone


Letters

The Nottingham Economic Review

Foreword I have been privileged to publish a number of articles for the Nottingham Economic Review over the years but I was absolutely delighted to be asked to write a foreword for this latest edition for a number of reasons. Most notably I have been a keen follower of the NER’s development over the years and have been a strong supporter of the concept of a student led publication. Further, the high quality of the articles and the variety of current global economic issues tackled makes it a thoroughly enjoyable read. Finally, seeing students apply their classroom learning and communicating that in a form that differs from the formal essay is equally exciting and ultimately a great test for the contributors. The energy and entrepreneurial spirit shown in getting interviews with key commentators and policy makers adds an extra dimension that can only come from a team effort in devising each edition. The key challenge for the future is to ensure the NER is sustainable both in terms of running the editorial and production process but also in drawing in a wider group of student and other inputs. I hope that by offering my support for this latest edition I can help with that process and I wish the editorial team the very best of luck in the future. Professor Wyn Morgan Assistant Pro-Vice-Chancellor for Teaching and Learning and Professor of Economics

Congratulations to our June 2014 Prize Winners Gainsborough Prize Winner: Euan Ritchie - Up for grabs? An evaluation of large scale land aquisition in Africa Gainsborough Prize Runner-up: Justin Beresford - Europe & the Eurozone

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The Nottingham Economic Review

Letters

Dear Readers, It is our pleasure to present the 14th issue of the Nottingham Economic Review. Since our founding in 2007, the NER has sought to promote increased student engagement with important current economic, political and social issues, whose wide ranging consequences affect the very fabric of society in which we live in. This issue discusses a diverse range of topics which we hope are of interest to the you, including the economics of terrorism, land acquisition in Africa, the impact of NSS Scores and affirmative action. We are also proud to present our discussions with Tim Harford, Senior columnist for the Financial Times, and Evan Davis, presenter of Dragons Den and BBC Newsnight, whose unique insight we hope you find as exciting as we did. This semester we have had some riveting submissions, with the Gainsborough Prize being awarded to Euan Ritchie for his article ‘Up for Grabs? An evaluation of large scale acquisitions in Africa,’ and the runner up prize being awarded to Justin Beresford for his article ‘Europe and the Eurozone – A lesson for Africa as it tends towards the monetary union.’ This year the journal enacted a series of radical transformations, including the implementation of a streamlined peer and faculty review process, the launch of our new website, and an extensive rebranding, all of which will serve as a strong foundation for many quality issues to come. Every issue reflects the dedication and support of a wide variety of individuals whose efforts make the production of this journal possible. We would like to thank the Vice Chancellor Sir David Greenaway, and the School of Economics along with the Head of School Professor Kevin Lee for their continued and unwavering support. We would also like to thank Philip Watson for his generous intellectual and financial contribution. Our deepest gratitude however lie with the NER team from the Design Board and Associate Editorial Board to the Sponsorship and Marketing manager, whose unparalleled enthusiasm and commitment made it not just a pleasure but a privilege to work with them. Finally, we would also like to extend our sincerest thanks towards all the students who took the time and effort to contribute to the journal this semester. This is our last issue as Chief Editors and we are honoured to serve the NER this year. We are excited to share this issue with you and hope that we have set a solid foundation this year which will provide you with informative and inspiring pages in the coming years.

Sincerely,

Anthony Jackson and Usman Saleem Editor-In-Chief for the Nottingham Economic Review

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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 Anthony Jackson Usman Saleem Managing Editor Gabbie D’Mello Associate Editors Adam Goldstein Antonina Hassouni Ben Hodges Diana Beltekian James Longman Hannah Kirby Finance and Marketing Manager Dominic Moir

Special Thanks to Philip Watson Hilary Clayton Sue Berry Louise Hemming Wyn Morgan Charles Gedeon Contact: General: team@neronline.co.uk Advertising: marketing@neronline.co.uk Submissions: submissions@neronline.co.uk Website: neronline.co.uk Sponsored by Ernest & Young

Design Board Jason Sayer Katie Whitehead Grace McLaughlin

GET INVOLVED!

Submit your research and articles to NER ÂŁ500 Gainsborough Prize for the Best Submission For more info, including our latest issues, visit www.neronline.co.uk or email team@neronline.co.uk

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The Nottingham Economic Review

Contents

Contents 02

Foreword and Prize Winners

03 Editorial 04

The NER Team

05 Contents Features 06

Minsky’s Moment in the Post Crash Era - Kirby

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Why Does Biodiversity Matter? - Joshi

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Affirmitive Action - Hodges

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Drug Dependance, a Development Issue - D’Mello

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The Modern Day Polymath - Cann

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World Bank & Globalization: Are they Compatible in thw 21st Century? - Beltekian

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Up for grabs? An evaluation of large scale land aquisition in Africa (Gainsborough Prize Winner) - Ritchie

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Europe & the Eurozone - A lesson for Africa as is tends towards monetary union (Gainsborough Prize Runner Up) - Beresford

Research 21

Can Exercise Improve Acedemic Achievement? - Powell

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The Influences of Student Satisfaction in UK Higher Education - Teshuva

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The Economics of Terrorism, an Empirical Crisis - Saleem

Interviews 35

A Conversation with Evan Davis - Longman & Hassouni

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A Conversation with Tim Harford - Longman

Bibliography 39

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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Features

The Nottingham Economic Review

‘Minsky’s Moment’ in the post crash era Hannah Kirby (BSc Economics & Politics, ‘15, The University of Nottingham)

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..n what has been referred to by some as a “quiet revolution against freemarket teaching” , last year saw a group of students actively campaigning for changes to be made to the undergraduate economics syllabus. Post Crash Economics, a society formed by students at the University of Manchester, claim that the discipline is being taught as a ‘value-free field of social science’. Despite being backed by a number of highly respected economists and lecturers, the attention surrounding the society has somewhat faded in recent months; not least due to the lack of enthusiasm shown by students at other institutions. Nottingham has managed 66 members on an inactive Facebook group; nothing more substantial than that. But the fundamental ideology behind Post Crash deserves more attention – especially from today’s future economists, bankers, CEOs etc. In March this year the BBC ran a program called ‘Why Minsky Matters’ . It drew attention to an economist whose theories fail to gain mention in any undergraduate macroeconomics lectures, despite his ideas being regarded now, even by the some of the mainstream, as an acceptable explanation of the still recent financial crisis. One of the ways in which the Manchester students have criticized the syllabus is the narrowly concentrated focus it has on neoclassical economic ideology. What’s taught is assumed and argued to be the truth. Economics, by textbook definition, is the ‘allocation of scarce resources’. In reality, ideas on how to intervene in the macro economy, specifically the ways in which monetary and fiscal policy are implemented, change over time - generally in line with political persuasion. In the study of politics there is a focus upon both mainstream and radical approaches; there is a general acknowledgement that neoliberal theory is not the only or right way to study the discipline. When economists like Minsky come into the spotlight again and again, adopting a similar attitude towards teaching economics should surely get a bit more consideration. Minsky

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himself provides a pretty good argument for the post crash cause. Why, of all the radical economic thought, is he being considered as a genuine challenge to mainstream economic theory? And why is he making the news in 2014? What draws people to Minsky’s ideas, especially post 2008, is the idea that stability itself is destabilising. He argues that the economy moves from stability to instability to crisis; economists later coined the term the ‘Minsky moment’. His most prominent work is the financial instability hypothesis (FIH); claiming that the ‘financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles’ . With this mindset he argues that Government intervention is an absolute necessity. The free market economy cannot be left to regulate itself. At the time of writing the FIH, Minsky claimed that “Government interventions aimed to contain the deterioration seem to have been inept in some of the historical crises” . Which is why, post 2008, his ideas return to the forefront of radical economic thinking.

“What draws people to Minsky’s ideas, especially post 2008, is the idea that stability itself is destabilising” The aspect of Minsky’s work that could impact so greatly upon undergraduate economic teaching, however, is his focus on the idea that economics should be far more narrative. It’s only since the 50s that mathematical models have completely dominated the world of finance. These have become increasingly complex, and - from what a basic grasp through studying economics will prove - they are based on strict assumptions. What Minsky argues is that “models become an end in themselves” . Yes, maths is precise, and provides a logical explanation for booms and busts. Macro models

can be used to make predictions, to speed up transactions, to calculate risk. But maths can’t explain what’s happening in the real world. Uncertainty, irrationality, exuberance... none of these things can be expressed in numbers or graphs. What’s missing here, “on the precipice of the global collapse” - and in undergraduate teaching - is an acknowledgment of reality. More consideration of reality is what Minsky most advocates. To have a grasp on reality he emphasises the role of banks within the financial system. In this regard he differs less from neoliberals such as Friedrich Hayek than is often thought. Minsky regards banks as the pump within the financial system, rather than an institution facilitating transactions which can get pushed into crises. In terms of the recent financial crash, it is the risky behaviour of those within the banking sector that play a crucial role. Few would deny this; but what Minsky brings to light is how the “explosive euphoria” of these financiers promotes instability within the system. Where post WW2 policy makers blanked the Great Depression from their memories, Minsky called for control of “risky ventures” and “commitments of future revenues” that don’t always appear. It is on these grounds that he promotes central bank intervention and countercyclical budget deficits. It’s not only Minsky that believes words should be used more frequently to express economic activity. The Guardian ran an article a couple of years ago drawing attention to a line of thought regarding ‘stories’ in economics . Psychologists at the time highlighted the “narrative basis to human thinking” – it’s the way we learn and remember. The article retells the 2008 crisis in a series of stories; of Greece, of real estate, and of stock market bubbles. And it tells them in a way that any reader could probably understand. But why should we care? Perhaps, because, by the time of being over half way through an economics degree, I would have expected to know a little bit more about the economy. Maximising profits and lagrangian functions are all interesting enough, but explaining financial booms and busts, and how changes in interest and inflation rates impact society - in real life


The Nottingham Economic Review

terms - are a whole different matter. The Post Crash crew make a good point; the social impacts of the economy – of financial crashes and the rest – are something viewed “as ‘outside economists’ domain by economists, but ‘inside economists’ domain by everyone else” . Economics is, and should be, part of the social sciences; but what undergraduates are studying now is a whole lot more science

Features

than it is socially applied. Perhaps economists can take a lesson from Hyman Minsky; both in the lecture room and on the main stage. References: http://www.theguardian.com/business/2013/oct/24/ students-post-crash-economics http://www.post-crasheconomics.com/ http://www.bbc.co.uk/news/magazine-26680993 Minsky, Hyman P, (1974). ‘The modelling of financial instability: and introduction.’ Modeling and Simulation

http://www.levyinstitute.org/pubs/wp74.pdf http://www.bbc.co.uk/news/magazine-26680993 http://www.businessinsider.com/the-dismal-stateof-economic-theory-and-the-opportunity-for-anew-beginning-2010-9 http://www.bbc.co.uk/news/magazine-26680993 http://www.theguardian.com/business/economicsblog/2012/sep/21/economic-forecasting-changingnarrative-crisis http://www.post-crasheconomics.com/

Why does Biodiversity Matter? Yogita Joshi (BSc Economics, ‘14, The University of Nottingham)

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..he term biodiversity is used to describe the number, variety and variability of living organisms (UNEP, 2014). It is now common practice to distinguish biodiversity as falling into one of three categories: genes, species, and ecosystems. Our appreciation and management of biodiversity is somewhat under scrutiny, as studies show diminishing numbers in Mother Nature’s arena. Biodiversity, rather the conservation of this, is important from an economist’s standpoint as extinction (the loss of biodiversity in its extreme form) is irreversible and can instigate destabilising effects on the environment (Heal, 2004). Figures suggest that as much as $1 billion is added to the US agricultural output each year as a result of plant diversity. Increasing yields of rice, wheat, tomatoes and other commodities have contributed to the natural productivity of ecosystems. The fallacy of not recognising biodiversity’s importance can be realised when one considers the effects of turmoil. For example, Minnesota, and North and South Dakota can no longer produce wheat and barley crops due to a lack of genetic resistance. This means that they are unable to withstand new strains of the scab and vomit toxin. “Keystone species” are recognised as important in the ecosystem whereby the extinction of them can cause detrimental imbalances in the food chain, as was the case with Californian Sea Otters. Critically endangered Hawksbill Turtles also embody this trait, as they remove prey such as sponges from the coral reef (WWF, 2014). They also provide a useful source of tourism income. However, their loss is being

driven by excessive egg collection, fisheryrelated mortality, and pollution. The symbiotic relationship that exists between macro-fauna such as the common earthworm and the soil it subsists in is another example of the complexity and advantages organisms hold. While worms consume and digest organic, discarded plant matter, they are understood to improve soil structure and stimulate microbial populations; thus promoting vegetation. A recognisable value of biodiversity is its application to pharmaceutics. From Insulin, historically produced from the pancreatic tissues of a pig, to morphine, created from seeds of the opium poppy, the medicinal breakthroughs from biodiversity are limitless. What we think of as poisons and toxins are in fact what we use to beautify ourselves in the evermore materialistic society we live in. Botox, for example, is produced from the lethal toxins of Clostridium Botulinum bacteria. The discovery and route to market has paved the way for a lucrative cosmetic surgery industry, but has also created a series of purposeful uses for the treatment of chronic migraines and urinary incontinence. It is claimed that in the U.S., 37% of medicines sold are originally derived from plants or other living organisms (Heal, 2004). This significant figure illustrates the many benefits we can extract from biodiversity in our ecosystem. Researchers estimate the cost of conserving our ecosystem’s habitats to be approximately $76 billion a year (Cressey, 2012). Butchart, a conservation scientist, argues that these aren’t

“bills” but rather “investments in natural capital” Under the Convention on Biological Diversity, international governments have committed to meeting certain conservation targets. While the targets signify fundamental goals for biodiversity, it has been apparent that actual spending on this matter is far less than the marginal costs and benefits of conservation. Perhaps this is not surprising as the “public good” feature of biodiversity implies it will be undersupplied by the free market. We have seen how the many facets of biodiversity can impact our lives; hence, should it not be up to us to engage with the very forms of life that have helped us to progress? As the common saying goes, there are plenty more fish in the sea. However, if we fail to preserve, protect, and promote the value biodiversity has, we may one day wake up to suffer the loss of many of Earth’s beloved species. References Cressey, D. 2012. Global biodiversity priced at $76 billion. [online journal]. Nature Publishing Group. Macmillan Publishers Limited. Available from: doi:10.1038/nature.2012.11582. Heal, G. 2004. Economics of biodiversity: An introduction. Resource and Energy Economics. 26: 105-114. United Nations Environment Programme. 2014. What is Biodiversity?. [online] Available at: http:// www.unep-wcmc.org/what-is-biodiversity_50.html [Accessed: 6 Apr 2014]. World Wildlife Fund. 2014. Hawksbill Turtle. Species WWF. [online]. Available at: https://worldwildlife.org/ species/hawksbill-turtle [Accessed: 6 Apr 2014].

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Features

The Nottingham Economic Review

Affirmitive Action Ben Hodges (BSc Economics, ‘15, The University of Nottingham)

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ffirmative Action, or positive discrimination, is the practice ..of actively promoting the .opportunities of discriminated minority groups. It is a response used in many countries, with many different methods of implementation. For example, in India almost half of all government jobs are allocated to members of tribes and castes that were historically discriminated against. In order to list on the Malaysian stock exchange, companies must dedicate 30% of their shares for ethnic-Malay investors. In America some academically selective schools and universities operate a race-preferential admissions policy. Black students, for example, receive lower grade requirements. (This system is currently under review by America’s Supreme Court). For other countries, affirmative action is illegal. Japanese and South Korean universities cannot include social background or ethnicity as criteria; a one-size-fits-all test must be passed regardless. The UK has similar legislation, as the 2010 equality act makes it illegal to select on the grounds of factors like race and gender. Opinion on affirmative action is hotly divided. Given such pronounced national differences, as well as the fact that each country necessarily has their own culture, history and demographic, this comes as no surprise. Through considering some of the key arguments on both sides and evaluating the economic impact, I argue that it is time for affirmative action policies to adapt. In some cases positive discrimination can indeed be beneficial, but only if it is applied in an appropriate manor.

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While few would argue against fighting discrimination, many consider affirmative action to be a poor way of tackling the issue. There are a number of drawbacks. Opponents claim that positive discrimination is discrimination all the same. Speaking in 2007, US Chief Justice John Roberts backed this viewpoint: “the way to stop discrimination on the basis of race is to stop discriminating on the basis of race.” By keeping society aware of the barriers that divide it, it could in fact sustain a situation of racial tension; strengthen negative stereotypes and reinforce a lack of equal opportunity.

“one in every three black males born today can expect to go to prison” Other critiques claim that affirmative action is simply unfair. Those who work hard may lose out to a weaker individual as a result of some extrinsic factor. From the perspective of the beneficiary, it cheapens an individual’s accomplishments. Indeed, regarding the American school preference system, Sander and Taylor argue in their book “Mismatch” that it can result in the racial group in question suffering: students accepted because of the preference system often experience social segregation, feelings of inferiority and have higher dropout rates. The incentive altering effects of affirmative action present the risk of moral hazard. Beneficiaries may feel they need not work as hard because they’ll get the placement

regardless, while those from outside the minority group may be deterred from trying if they believe they’ll loose out no matter how highly they achieve. As a result, the effort exerted by both parties may actively be reduced. There is also a practical case. While beneficiary groups of affirmative action are indeed generally poorer and lacking of opportunity, the individuals who take advantage of it are often not. It is the privileged and affluent members of the minority groups who frequently benefit. One federal-contracting programme in America favours businesses whose owners are black on the grounds that they are “disadvantaged,” even if they are 87 times richer than the average American family. Finally, affirmative action is criticised as being inherently inefficient as it involves a misallocation of resources. A weaker candidate may be chosen over a stronger one. Given such strong opposition, why does positive discrimination persist? The burden of history is important. Defenders of affirmative action remind us that, no matter where in the world you look, recent history is tarnished by discrimination. Such circumstances have left us with a residual situation of imbalance and unfairness in society. Action, in the form of temporarily favouring groups in society, is therefore warranted to combat this. In some instances, such as with learning environments and police forces, the case for diversity is particularly strong. A study by the University of Michigan found that young people perform better in an ethnically diverse learning environment, and it is easier for society to respect and trust a police force that


Features

The Nottingham Economic Review

is representative of society. Indeed, shadow This battle is well illustrated by Texas the UN human rights committee, found that University, which has recently been the if trends continue, one in every three black home secretary Yvette Cooper recently subject of a US Supreme Court ruling due to males born today can expect to go to prison. called to change the law to allow for positive discrimination in this instance, stating that its consideration of race in its undergraduate For white males, it is one in every 17. We must “the police need to reflect the communities admissions process. It came after Abigail continue to fight against such imbalances. This writer believes they work in.” More that, in most cases, generally, longwe can do this term economic without having gains may result to rely so heavily from affirmative upon positive action, because the discrimination. enfranchisement States and of minority groups institutions still have increases the a role to play. Policy competition in the makers should skilled labour force. address the causes Proponents of this of the issues, with argument rebut the a focus on areas earlier claim (that like education and affirmative action improving inner city is inefficient) as neighbourhoods. short-sighted, as it Indeed, to rely fails to consider the less on affirmative long-term, wider Photo by: Al Behrman Students demonstrate outside the Federal Courthouse on March 7, 2012, in Cincinnati, where the Sixth Circuit action is in itself efficiency gains Court of Appeals was hearing oral arguments in their review of their 2011 ruling that Proposal 2, the ban on affirmative action in sending a message that arrive through Michigan, is unconstitutional. (Associated Press) that we’re all equal. This could act to remove a move towards a more inclusive society Fisher, a young white woman who was harmful stereotypes. and culture. Wilkinson’s and Pickett’s book: rejected from the university, filed a lawsuit “The Spirit Level: Why Equality is Better arguing that she had been a victim of racial So we must alter affirmative action policies, for Everyone,” discusses a literature which discrimination. She said she’d been denied a but how? It is incredibly difficult to find a shows that more equal societies do better position despite being a stronger candidate, universal solution. Because different countries according to almost every quality of life simply because she was white. have varied cultures and are at different indicator. stages of economic and social development, After months of waiting, the court eventually each must transform their affirmative Indeed, the UN believes that “affirmative sent the case back for reconsideration. Such action policies suitably. Generally, though, a action programs may be required of uncertainty and divided opinion is typical for movement away from using race as criterion countries… in order to rectify systematic affirmative action cases worldwide. In any and towards economic factors like household discrimination.” case, at a time where the costs are clear yet income would make for a more effective the benefits increasingly uncertain, affirmative policy. Incomes (and therefore opportunities) However these arguments rely on the action is becoming difficult to justify. have become increasingly disparate in assumption that affirmative action is in fact many countries over the past thirty years. effective at reducing discrimination. While Race preferential affirmative action was first To take account of the fact that some young discrimination is generally diminishing, this used by the American federal government in people grow up in environments that make it could be due to many reasons – many of them 1961. This was 3 years before the Civil Rights incredibly difficult to succeed in, is arguably ambiguous, intangible and immeasurable. In Act; a time where it was still legal to deny important for situations like university America, President Obama’s inauguration someone a job on the grounds of sex, religion admissions. This would also put an end to may have incentivised young black people and race. There was a much greater need for privileged individuals within minority groups to attend college more than any affirmative positive discrimination. Society is different benefiting. action policy. now. Such cloudiness can make it difficult to form a clear stance on the issue. This is worsened by the fact that many instances of affirmative action cause ideologies to conflict, because to fight discrimination seemingly comes at the cost of being unfair on the rest of society. For this reason, even the courts in America are struggling to decide if affirmative action is constitutional.

With a changing world that is less discriminating than in the past, affirmative action policies must adapt with it. This is not to say that issues of intolerance, bigotry, and prejudice are no longer present. They are. Social differences and racial disparities are still a significant characteristic of many societies. A recent report on the American criminal justice system that was presented to

We must remember that the changing of social norms is a long process. We have come a long way since the racism of previous generations, yet we are still far from living in society that offers similar opportunities. With a view to the future, we must consider and address the causes of such disparity and adopt a more adaptive and pragmatic approach to affirmative action.

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Features

The Nottingham Economic Review

Drug Dependance - A Development Issue Gabbie D’Mello (BSc Politics & Economics, ‘14, The University of Nottingham)

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eignited by the legalisation of cannabis in Colorado, the level of support for legalisation has been at an all-time high. The legalisation debate in its simplest form relies on the concepts of individual rights versus societal security– do people have the right to choose or do governments have the duty to protect society from the negative effects of drug consumption? Being drug-dependent is often used to refer to people who are addicted to consuming drugs that they become unable to function without it. This article explores the other side of drugdependency. Though less widely publicised, the farmers who produce drug crops and rely on the drug trade for their livelihood are of equal importance and weight in the drugs debate. While the debate of whether or not to legalise or at least decriminalise traditionally illicit drugs persists, farmers who grow drug crops in developing nations continue to be adversely impacted by supply-side control policies imposed by consumer nations. As policy makers, activists and politicians attempt to form an international consensus on the status of traditionally illicit drugs, it is important to consider the ongoing effects of drug control policy on the drug producing developing countries. The history of international drug control policy has been overshadowed by militant, repressive measures championed by the US and the United Nations Office on Drugs and Crime (UNODC) that subscribed to and perpetuated the War on Drugs rhetoric. With the criminalisation of drugs, users are deemed criminal, and those producing illicit drug crops like coca crops and opium poppy crops are treated as a security threat. However, the areas where these crops come from often coincide with high rates of poverty, and very low standards of living. Though UN conventions and treaties stress the focus on the rights and welfare of people, the measures employed to prevent drug production have violated human rights in many countries. Instruments of drug control include involuntary and voluntary crop eradication, which has involved chemical spraying of illegal crops, alternative

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development and making aid conditional on improved drug control performance. I argue that this failure of the War on Drugs methods in curtailing drug production in developing countries is due to policies being implemented which have ignored the real role of drug crops in developing countries and further hindered development. The main culprit for the misunderstanding of the role of drugs in rural areas of developing countries is a misuse of economic theory. In the primacy of drug control, it was assumed that farmers would grow drug crops just because of their high hectare value. This is a simplistic picture of motivations for crop growing and led to unhelpful policy decisions. The narrow and reductive approach initially taken that described drug farmers as rational, profit-maximisers has not only hindered drug eradication but as a result, hampered development. It also epitomises the common problem of relying heavily on economic theory alone to understand a complex social, political and economic problem.

“Afghanistan supplies 90% of the world’s opium” Farmers from Afghanistan that were interviewed by the BBC claim that they grow opium out of necessity and if they could swap to licit crops they would . In the Putumayo region of Colombia the Association of Women Pineapple Growers decided to farm pineapples instead of the more lucrative coca plants. Pineapple crops involve hard labour, and due to their isolated locations, often involves days of walking before they can sell their crops for a pittance; if their pineapples manage to stay fresh for the journey. When there are clear examples of a desire to grow licit crops despite their monetary value, other motivations must be explored within the specific geographical, social and cultural context of the farmers. A more informed understanding of the motivations of farmers would involve micro-level analysis. This must not just be differentiated by country as regions within the same towns possess various environmental and societal factors that change incentives and

motivations for farmers. Understanding the poppy farmers of Afghanistan Afghanistan is an interesting case to consider as it has a long history of drug control policy with both a security and developmental focus. Afghanistan supplies 90% of the world’s opium , but 36% of the population live below the poverty line . Based on the UN measure of human development- the Human Development Index ranks Afghanistan in 164th place out of 175 countries published with 0.374 points. The systemic threat of rampant corruption in the country severely impedes the state’s ability to deal with the humanitarian, societal and economic damage left by years of war. Transparency International ranked Afghanistan in the bottom three worst performers in 2013 for public sector performance along with Somalia and North Korea scoring just 8/100 points each . Despite its growing drug production being one of the reasons for intervention by Western countries and development agencies, little has changed. Afghanistan remains a fragile state with a thriving underground economy, a suffering licit economy and widespread poverty. There are some factors that influence poppy production that can be widely applied to most drug producing communities within Afghanistan. The climate and environment plays a key role in determining whether or not poppy is grown because in some of these places, there is simply no other alternative, or the alternative is much too expensive to irrigate. Opium poppies happen to be resilient crops in these harsh climates. Development economics teaches us that it is not just about hectare value, but the guarantee of income. Income smoothing is an approach taken by farmers to mitigate risk and ensure a steady flow of income. A failed crop does not leave the poorest of farmers just out of pocket, but incapable of looking of providing food and shelter for their families, so there is high risk aversion among farmers in this position. This aversion combined with missing credit mechanisms and lack of accessibility to


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The Nottingham Economic Review

formal financial markets leads to a potent mix of desperation. Harvesting and selling licit crops like cotton and saffron on the world market leave them susceptible to market shocks; shocks that could leave them hungry and homeless with just one season of poor market conditions. The failure of cotton crops in the drug producing provinces of Afghanistan highlights the inadequacies of selling licit crops on a global market open to price fluctuations, as opposed to an illicit crop on a black market. Armed movements like the Taliban can exploit this desperation by creating informal and coercive financial contracts. A BBC Panorama documentary ‘Britain’s Heroin Fix’ (2005) documents Afghani farmer Isakhel Surkhrodan’s situation, where his granddaughter is used as collateral in a perverse lending scheme with Taliban members who provide him with seeds to start up in exchange for heroin . Unfortunately, Surkhrodan’s story is not uncommon in farmers of his situation that are in debt to the Taliban. ‘Opium brides’ have become commonplace within the poppy industry where daughters of farmers are used as a bartering tool to pay off debts to drug lords or more powerful traffickers. The state of Afghanistan has been left in ruins by the countless civil wars and military occupations that have occurred over the last decades. As a result, the government, which is the backbone of society, is unable to fulfil the basic functions of a state. The rule of law just does not stretch to the opium producing regions where allegiance to the Taliban is enforced. Even where the central government has shown interest in assisting farmers to move away from poppy growing, there is a general distrust between central and regional government. In places like Khandahar, it is commonplace to know provincial authorities are under the thumb of drug lords or even directly involved in drug trade. Drug producing communities are on

the outskirts, not just geographically but often on the fringes of society and the law. Where the government has been unstable and not as effective in reaching inhabitants, drug lords have found a way to substitute amenities offered by the state. The illegal nature of the drug industry allows mass profits to be made and so allows well-resourced drug lords to

women and had devastating effects on their livelihood.

provide the transport infrastructure necessary to transfer crops from remote areas. Given the geographic immobility of farmers in these areas, and lack of state provision, farmers have little choice.

politically sensitive problem of illicit drugs with sustainable rural development and seeks to address the underlying development problems that are the cause of illicit drug crop cultivation’.

The above mentioned circumstances are generally what can be observed in Afghani drug producing communities; nevertheless they do offer insights into other countries. Lack of infrastructure, uncompromising climate and powerful armed groups are all features of the coca producing countries of Colombia, Bolivia and Peru. Policy to counter the threat of drugs has been heavily security focussed, but the above observations all beg for a more humanitarian, developmental approach. The legacy of the War on Drugs is harsh eradication and interdiction which has left several unintended consequences. For example, drug eradication policies were pursued in the Andean region with plenty of financial support from their American neighbours. One of these policies was aerial crop spraying which did eradicate a vast number of illicit crops, but only served to relocate coca production and in the process took out licit crops of the Putumayon

There has been success in small scale alternative development projects as a way to wean famers off growing poppy. Saffron has emerged as a wonder crop, it is less expensive to irrigate than poppy crops and yields high profits. “Saffron is not only a legitimate crop but also a very lucrative one, which has strong potential to replace poppy cultivation,” Zalmai Afzali, a spokesman for the Ministry of Counter Narcotics. Afghani Business News reports a spread of saffron production from 20 to 26 provinces, and quotes the Minister of Agriculture Asif Rahimi estimating that over 4,000 kilos of saffron had been exported in 2008 earning USD 5,000USD 6,000 per kilogram. However, the UNODC table below shows opium cultivation after 2008 fell by approximately 25,000 hectares, but by 2011 these figures were on the rise again. Highlighting a failure of a lasting effect of such projects.

An alternative drug policy A policy that focuses on the welfare of farmers instead of the empirics of drug crop production is known as alternative development. It was initially conceived as part of a larger movement that criticised the mainstream ‘neoliberal’ development path as the model to be emulated by developing countries; instead of technology induced progress, agency work and people’s capacity to effect social change was focused on. In terms of drugs policy, alternative development refers to ‘a multi-sectoral approach to rural development and drug control in drug producing areas, particularly where coca and opium poppy are grown. It merges the complex and

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As policy makers struggle over picking the right alternative crop for the right area and ensuring its marketability while combatting deep-seated social and cultural traditions

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The effects of forceful drug eradication, specifically strategies such as aerial crop spraying, and cutting down drug crops are very short-term solution. As well as the long-term

surrounding growing opium, opium production levels have not been promising. Last year, in Helmand, farmers turned back to growing opium after cotton crops failed to make a profit . As a drug eradication policy, the history of implementing alternative development is chequered with success and failure.

inefficacy of such measures, it creates a myriad of unintended consequences- by defending against the ‘threat’ of drugs, forceful eradication can create threats. Military responses can incite growing resentment between farmers and ‘outsiders’- this is particularly relevant in the Taliban controlled regions of Afghanistan where there is an existing vendetta against the West.

Failures have been down to a lack of knowledge about local areas the projects were run in, and a flawed or incomplete idea of the role of illicit drugs in that community. This highlights the inability of one strategy alone to control opium production. Alternative development can be an effective tool to support farmers in pursuing licit crops while maintaining income and creating a livelihood. For this to work, policy makers must bring farmers into the decision making process and use their knowledge in determining viable alternative crops and then arrange the financial and political support to help them. This is still just one tool in drug control policy and can only be harnessed to its full potential when used with complementary supply and demand policies.

Secondly, while the concept of alternative development can seem the answer to a complex problem, it is only part of the story. If the focus is truly on development and poverty alleviation, there needs to be a variety of actors involved in the drugs issues of developing countries. Rather than each organisation focussing on the own remit, that is, UNODC focussing on eradicating drugs, development agencies on alleviating poverty, there needs to be a fusion of the aims of each agency. There needs to be awareness in the international community of the complex social and economic problems caused by illegal drug production in developing countries along with an understanding of the role that poverty plays in perpetuating the trade. By debunking cultural perceptions of farmers as ‘evil doers’ rather than victims of a failed state, poor agricultural conditions and little options, more aid agencies could be more likely to take on and tackle drug-related issues.

Minimizing drug related damage to development In order to effectively limit the damage of illicit drugs industry in developing countries, a variety of factors need to be addressed. Firstly, drugs in developing nations must be seen as primarily a poverty issue before it is seen as a security threat to other countries.

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Finally, the drug agenda in consumer countries has a visible and significant impact in the drug economy. Due to the separation of consumer from producer in this global economy the conditions in which our products were made in it

is often not thought about. From this of course stems the wider debate of the criminalisation of drugs in consumer countries. There are strong arguments on both sides of what the decriminalisation or legalisation of drugs would do to the political economy of drugs. By legalising, the whole industry would come under the rule of law and would be able to be policed and regulated. However, in developing countries like those discussed above, governance is weaker especially in drug producing communities. It is difficult to accurately predict the effects of legalisation of drugs in producer countries. What can and must be addressed is the treatment of farmers that produce drug crops. Within drugs policymaking, I do not wish to undermine the importance of putting the rights and welfare of the drug addict at the forefront of discussion, but argue that of equal importance is the rights and welfare of those producing the drugs. In order to have an equal and well-informed discussion of the consequences of legalisation, there must be an exploration of the effects of changing drug control policy on the developing countries that depend on producing drugs. This is especially true given the negative impact of drug control policies on developing countries. References Britain’s Heroin Fix’ BBC One Panorama [dvd], 2005 http://www.lawg.org/component/content/ article/79/1187 UNODC Opium Survey Afghanistan 2012 - http:// www.unodc.org/documents/crop-monitoring/ Afghanistan/Afghanistan_OS_2012_FINAL_web. pdf http://data.worldbank.org/country/afghanistan http://countryeconomy.com/hdi/afghanistan http://www.transparency.org.uk/component/ content/article/12-blog/805-corruptionperceptions-index-2013 Britain’s Heroin Fix’ BBC One Panorama [dvd], 2005 http://www.foreignaffairs.com/articles/137315/ fariba-nawa/the-truth-about-opium-brides http://www.lawg.org/component/content/ article/79/1187 Mainstreaming Alternative Development in Thailand, Lao PDR and Myanmar: A Process of Learning Renard https://www.unodc.org/documents/laopdr/COLAO/ Impact_Assessment.pdf IRN 2008 http://www.irinnews.org/report/79647/ afghanistan-can-saffron-replace-poppy Afghani Business News http://www.wadsam. com/saffron-production-spreads-from-20-to-26provinces-across-afghanistan-232/ http://www.bbc.co.uk/news/world-asia-22150482


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The Modern Day Polymath Julian Cann (BSc Economics, ‘16, The University of Nottingham)

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ong before the advent of modern economics, humankind has sought to understand the processes which drive the world and its people. During the Golden Age of Islam and later the European Renaissance, it was the polymath, a person of wide knowledge and learning, who took on the consideration of these issues. While many of the scientific questions which captivated such thinkers as Omar Khayyám, Leonardo da Vinci and Francis Bacon are no longer a mystery to us, we remain a long way from understanding how and why the world functions as it does. It could be said that the heir to the polymath in our age is the economist. The breadth of economic thought continues to spread inexorably, far beyond the traditional “supply and demand”. For example Alvin Roth, one of the winners of the 2012 Nobel Memorial Prize in Economics, has applied game theory to the problem of matching organ donors with patients1. The perception of the economist as no more than an analyser of markets is unjust: wherever there is scarcity, decisions have to be made. This is the place of the economist, and it is increasingly relevant as the global population rises to new heights. In recent decades, mathematics has become the primary tool of the economist. This has been necessary to create complex models that aim to predict the interplay between numerous economic variables. Modelling – the art of simplifying the world through assumption in order to build a mathematical framework – is undoubtedly a necessary abstraction. When you give someone directions, you omit irrelevant information, or else you risk getting the person even more lost. However, the failure of mathematical models to predict the catastrophic Financial Crisis of 2007-2008 has called into question the efficacy of this narrow approach. This conflict between mathematical certainty and an uncertain reality is broader than sharp economic downturns. Indeed, it is questionable whether the mathematical “efficiency” that has come

to inform public policy in fact provides the social optimum, given the gaping inequality which has emerged in the UK2 and much of the West. By the same token, the depiction of hugely volatile and erratic international financial markets as the closest example to the benchmark of perfect competition according to mathematical formulae is potentially destructive. To many critics of modern economics, the emphasis placed on mathematics has created a dichotomy between what economists set out to achieve and the remit of what is, after all, a social science. The strict assumptions belying economic models have reached dogmatic proportions, leading to an intellectual inflexibility at odds with a dynamic world. Robert Skidelsky’s claim that economics today “has become a branch of applied mathematics”3 may well be overblown, but his call for economics to be taught in a much wider context has merit. Some of the most influential economic thinkers had a thorough grounding outside of the discipline – John Maynard Keynes’s outlook was as philosophical as it was economic, while Friedrich Hayek earned doctorates in law and political science before turning his attention formally to economic thought. Nevertheless, mathematics remains essential to economics – there need not be less mathematics in economics if there can be more of everything else. The problem arises when economists disguise (or confuse) mathematical predictions based on incomplete data as guaranteed future events. This has proven corrosive for the reputation of economics. In Season 3 of in HBO’s The Wire, Maurice Levy chides Stringer Bell after he is duped by a corrupt politician: “He rain made you. A guy says if you pay him, he can make it rain. You pay him. If and when it rains, he takes the credit. If and when it doesn’t, he finds reasons for you to pay him more.”4 The parallel here between the conduct of a fraudulent politician and the economic forecaster is conspicuous, and troubling. In his day, the polymath was widely respected and admired – the same cannot be said of the economist. Will Self’s denunciation of “the economic priesthood” of “false prophets”5

sums up negative public attitudes towards economists. Without doubt, a more holistic method to economic study would curtail those few economists who masquerade as omniscient and dispel this unfortunate notion. For the economist to truly be the modern day polymath his work must encompass a much greater array of disciplines; economic theory without application is often impractical. This is the case in the field of development economics, in which it is largely agreed that a country’s economic development must be viewed within a broader sphere. In Why Nations Fail, Daron Acemoglu and James A. Robinson powerfully combine political economy with historical background to argue that inclusive political institutions are fundamental to sustained economic growth in the long run6. It would have been impossible to obtain this striking conclusion from an insular, purely theoretical perspective. An alternate hypothesis asserts the importance of geography in determining development, presented notably in different forms by Jeffrey Sachs7 and Jared Diamond8, even incorporating elements of biology into their arguments. In either case, the approach is far more befitting of that of the polymath centuries ago in tackling the challenging questions of the day. A further example can be found in the advances of behavioural economics, popularised by works such as Freakonomics9. Here, experiments (such as those conducted at CeDEx at the University of Nottingham) seek to explain the underlying psychology which influences the decision making of individuals. This is in contrast to the orthodox stereotype of the utility-maximising rational consumer, in itself an awfully normative term: while it is true that there are students who spend their entire £5.10 meal card allocation every day, they are far from the norm. Although it may be too early to draw substantial conclusions from such research, it is becoming apparent that heuristics – experienced-based techniques for solving problems, such as a “rule of thumb” – are central in many financial choices10. By

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drawing from other disciplines, economists can reach more satisfying and more realistic outcomes. Before deciding to study economics, I pictured the economist as the greedy academic, hungrily sticking his or her fingers into as many disciplines as possible to conduct meaningful inquiries. Economics certainly has the potential to be the realm of the modern day polymath, as several branches of the social science have already adopted this methodology, but to do so meaningfully it must stop wilfully blinkering

itself and satisfying itself with dogmatic jargon. References

1. Knight, R. (2012) Al Roth: An economist who saves lives [Online], Available: http://www.bbc.co.uk/news/ magazine-20004050 [19 March 2014] 2. Elliott, L. (2014) Britain’s five richest families worth more than poorest 20% [Online], Available: http://www.theguardian. com/business/2014/mar/17/oxfam-report-scale-britaingrowing-financial-inequality [19 March 2014] 3. Skidelsky, R. (2009) Keynes: The Return of the Master. London: Allen Lane. p.150 4. The Wire, Episode 36, Middle Ground (2004) HBO, 12 December 2004 [Scene also available online: http://www. youtube.com/watch?v=lxQw0VoT538] 5. Self, W. (2012) A Point of View: And all shall worship

money [Online], Available: http://www.bbc.co.uk/news/ magazine-20756888 [19 March 2014] 6. Acemoglu, D. and Robinson, J. (2013) Why Nations Fail: The Origins of Power, Prosperity, and Poverty London: Profile Books Ltd 7. Sachs, J. (2001) Tropical Underdevelopment [Online], Available: http://www.nber.org/papers/w8119.pdf [19 March 2014] 8. Jared Diamond, 1997. Guns, Germs, and Steel: The Fates of Human Societies. 1st Edition. New York: W. W. Norton & Company. 9. Steven D. Levitt and Stephen J. Dubner, 2005. Freakonomics: A Rogue Economist Explores the Hidden Side of Everything. 1st Edition. New York: William Morrow. 10. Harford, T. (2014) Golden rules of thumb [Online], Available: http://www.ft.com/cms/s/2/b80dcd4c-9f46-11e38663-00144feab7de.html#axzz2uhpKza3o [19 March 2014]

World Bank & Globalization: Are they Compatible in the 21st Century? Diana Beltekian (BSc Economics, ‘15, The University of Nottingham)

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lobalisation has become one of the unspoken truths of our age, so much so that most are unaware of the extent of its pervasive nature and manifestations. However, the gains from the second unbundling of globalisation, through the information communication technology revolution have not been equally distributed. Thus, the World Bank Group, an enduring institution set up in 1944, has had and continues to hold an important role in restoring greater equity on the world economic stage. Between 1980 and 2012, GDP per capita in the US had more than quadrupled to $51,749. Over the same period, China’s per capita GDP had risen thirty-fold and yet only stands at $6,091 in comparison. Evidently, there has been an absence of income convergence worldwide leaving countless still in grinding poverty. Thus, the World Bank exists today to assist developing countries, both to offer financial assistance and development policy advice. However, globalisation forces have called into question its effectiveness and continuing relevance in the new global economic order. Origins of the World Bank The World Bank Group (WBG or World Bank) was first christened as the International Bank for Reconstruction and Development. It was established for reconstruction purposes after the devastation of the Second World War. More specifically, its aims were, and still

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are, to encourage development and alleviate poverty. The World Bank has set two goals to be achieved by 2030: first to “end extreme poverty by decreasing the percentage of people living on less than $1.25 a day to no more than 3%” and to “promote shared prosperity by fostering the income growth of the bottom 40% for every country.” None would question the need for provisions to achieve these goals. However, sceptics would point to alternative institutions and organisations that also strive for these ends and question whether the World Bank, set up 70 years ago, is still a relevant force in today’s globalised economy. Reform and Reorientation According to the High-Level Commission’s Report (2009), the World Bank commands a central position in the global multilateral architecture, yet needs to be reformed to function effectively in an increasingly interdependent economic environment.

“China now holds a 14.74% share of the world economy” The WBG’s comparative advantage lies in its strong credit rating giving it the capacity to raise and channel resources for development from world markets into developing countries. Alongside its affluence, it has amassed a

wide stock of cross-country development expertise as well as possesses highly trained staff. Consequently, the World Bank has unquestionably earned a reputation for being an institution trusted in promoting development. However, past successes do not excuse lack of reform in the present. Despite the World Bank’s success, there is need to reform and modernise its governance which retains the Bank’s old organisational structure. The unequal allocation of voting power has become an issue with the rise of developing countries and the shifting economic power that comes with it. In the World Bank, voting power is determined through ownership shares. Close to its inception, ownership shares were positively correlated to financial contributions. However, the rapid development of emerging economies, most notably the BRICS, means the US now owns a disproportionately large quantity of shares which developing members are beginning to take issue with. The US was allocated “35 per cent of Bank stock, in line with its comparative economic strength” (Jones). This granted a US veto over major changes involving the World Bank’s Articles of Agreement, demanding an 80% qualified majority in order to carry through proposed changes. Thus, with only the US holding more than 20% of the voting share, it could block any major changes to the


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Bank that does not suit American interests. However, today GDP as a share of the world economy at purchasing power parity has changed vastly. China now holds a 14.74% share of the world economy, a significant increase in the 25 year period from a meagre 3.81%. The US share stands at 19.53%, just maintaining its lead over China, yet has declined from 25.47% a quarter of a century ago. China’s double digit growth over the last couple of decades has given it more clout in the world economy that also demands greater influence over the activities of the World Bank. Therefore, the changing dynamics in the world economy need to be reflected in a reallocation of voting shares to maintain the credibility of the World Bank. The Beginning of the End Reform of the World Bank’s voice representation is non-negotiable; Americancentric views are no longer the sole dominant voice in the new global economic order. Obstinacy on the US’s part is likely to create tension between it and emerging economies that wish to exercise greater self-determination through acquiring greater control over international institutions. Prolonged inertia regarding substantial changes in voting shares or delaying them may, at worst, alienate developing countries from the World Bank that will turn to alternatives. Local development banks in developing countries may become a more attractive source of finance as conditions imposed may be more suited for the domestic companies operating in those countries. The Brazilian Development Bank (BNDES), for example, finances investments which modernise, stimulate the expansion of industry and infrastructure, and increase firms’ productive capacity. It supports clients ranging from individuals to private companies of any size and public administration as well, granting greater decision-making power to the country in regards to its economy at a micro level. In contrast, prospective members of the World Bank must have first joined the IMF. Moreover, with 188 current members of the World Bank, influence over loans is marginal compared to the power a country would exercise over its own development bank. The World Bank has also, in some ways, been eclipsed by Chinese outward investment into developing countries, especially Africa. China’s steady growth

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has created an appetite for raw materials, abundant in Africa, and new markets which are necessary for its continued development. Therefore, the Chinese Zouchuqu Zhanlue (“go-abroad” strategy), which began in 1998, initiated the country’s movement towards outward foreign direct investment. This has led to investment in natural resources and infrastructure projects across the developing world. These financing operations are closely reminiscent of the World Bank’s mandate. Principles guiding China’s lending, outlined by the Chinese Premier Zhou Ziyang (1983), include respecting the recipient country’s sovereignty, not interfering in their internal affairs and attaching no political conditions. These principles are clearly more attractive to prospective recipients than the strict conditions the World Bank imposes through the Washington Consensus principles that has, in the past, underpinned its operations. Thus, the changing world economic order means, as Caroline Anstey, the managing director of the WB, comments: “The North no longer acts as the model for development, it is much more South to South.” Multilateralism versus Bilateralism While the World Bank acting as an effective arbiter for global interests has come into question, there is no doubt that there is a need for an institution to reflect multinational interests and ensure fair treatment of all its members. This is arguably more important at the present time because the World Trade Organisation’s (WTO) Doha Round has been in discussion for more than a decade. This lack of effective multilateral action has slowly eroded confidence in its conclusion at all. Difficulties in reaching unanimous agreement are partly due to the wide range of interests that must be satisfied in these negotiations. Fewer members in the WTO meant members possessed more similar economies. Now membership includes developing countries negotiating alongside industrialised nations, introducing different interests and proving a challenge to conclude talks. With the WTO, another international institution, finding itself in difficulty, it is more important for the World Bank to retain its respected position through extending voting power of developing countries and proportionally reducing the voting power of the US. Lack of progress in the WTO talks means no multilateral trade policy is implemented, with

trade often used as a proxy for globalisation. As many developing countries strive for higher growth rates through industrialisation to raise living standards, they may feel forced to broker bilateral trade deals in an effort to forge alliances with the developed countries they hope will help them develop. Bilateral trade deals, through free trade agreements, do not always favour the developing countries who have less power when negotiating these deals without a multilateral framework. Thus, the World Bank has proven its resilience, still in existence since 1944. Its position in the world economy remains pivotal in ensuring successful development in emerging economies through its financial assistance and the advice offered. However, a more globalised economy has presented many viable alternatives to the World Bank, including regional banks that are tailored to specific country needs and requirements. In spite of these developments, a globalised economic system is likely to demand a multilateral institution that is practiced in aiding development. Hence, the World Bank shall need to adapt as times change while remaining true to its timeless mandate of achieving greater equality in an increasingly unequal world. References

BNDES. 2014. The BNDES. [Online]. Available from: http://www.bndes.gov.br/SiteBNDES/bndes/bndes_en/ Institucional/The_BNDES/ GRIFFITH-JONES., S., [no date]. Governance of the World Bank. [Online]. Available from: http://stephanygj. net/papers/Governance_of_the_World_Bank._Paper_ prepared_for_DFID.pdf (pg. 2) IISD. 2013. Chinese Outward Investment. [Online]. Available from: http://www.iisd.org/investment/research/ china.aspx IISD. 2013. Chinese Outward Investment: An emerging policy framework. [Online]. Canada: IISD and IIER. Available from: http://www.iisd.org/pdf/2012/chinese_ outward_investment.pdf POLITI., J. 2012. The new world order sets a double goal. [Online]. Available from: http://www.ft.com/ cms/s/0/4f67dffe-00ae-11e2-9dfc-00144feabdc0. html#axzz2xoiPJoDp Quandl. 2014. GDP as Share of World GDP at PPP By Country. [Online]. Available from: http:/www.quandl.com/ economics/gdp-as-share-of-world-gdp-at-ppp-by-country The World Bank. 2014. Data: GDP per capita (current US$). [Online]. Available from: http://data.worldbank.org/ indicator/NY.GDP.PCAP.CD?page=6 The World Bank. 2014. What We Do. [Online]. Available from: http://www.worldbank.org/en/about/what-we-do

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Up for grabs? - Land Aquisition in Africa Euan Ritchie (BSc Economics, ‘16, The University of Nottingham)

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..or a long time, the economist William Easterly had a clock on his website, counting the time it took for the World Bank to investigate serious claims that roughly 20,000 Ugandan villagers were being forced off their land at gun point. The situation occurred in the district of Kigoba, after the Ugandan National Forestry Alliance (NFA) authorised their removal, to make way for a British company to use the land. According to the villagers, the army and police were deployed to forcefully evict the inhabitants, often using violence. Giving their story to Oxfam reporters, they claim their homes were burned, crops destroyed, and livestock butchered. The British company had received funding from the World Bank’s investment arm, whose role it is to help provide much needed investment in Africa.

higher yield, which has increased the willingness of investors to look in unusual places. At the same time, traditional diversification methods have started to become less effective. Stock markets across the world are becoming more and more correlated; the correlation between markets in the west and emerging economies is approaching one. This means that regional diversification, previously an important characteristic of many portfolios, is becoming far less effective. Under such circumstances, land appears to be an attractive investment. First, consider correlation. Assets with highly correlated returns are subject to the same shocks; if one investment plummets,

Reasons So what is driving this huge increase in land acquisition? Broadly speaking, land has become a great investment in recent times, in part due to the recent financial climate. Interest rates have been remarkably low since 2008 when the global financial system collapsed. Of particular importance is the US interest rate, which has been close to zero. As this has traditionally been considered the risk free rate, it is viewed as an important marker against which investments are judged, and therefore has had a knock on effect across other investment classes. The low rates have triggered a search for

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One important driver of high expected returns is population growth. The world’s population is predicted to reach 9 billion by 2050, and the demand for agricultural commodities will have to increase to accommodate this. These commodities will need land to be produced. The resulting increase in demand for land will incentivise profit driven developers, as well as speculators who anticipate higher future prices. Another important factor is the rising incomes in several key emerging markets. Countries like China and India have huge populations; their burgeoning middle class increasingly have more income to spend on agricultural products.

The situation is riddled with a number of complications and contested points. The NFA claimed that the inhabitants were “illegal encroachers” and that their eviction was justifiable. The British company involved claims there “were no incidences of injury, physical violence or destruction of property.” But this doesn’t accord with the experiences the villagers reported, and given the seriousness of the claims this should be recognised. The situation serves to highlight what has been a growing trend over recent years: large scale land acquisition (LSLA) in developing countries. Estimates vary, as does the quality of appropriate data, but by all accounts land acquisition is a huge phenomenon. The most reliable estimates are probably from the Land Matrix, an initiative that seeks to promote transparency in land deals, although even they acknowledge reliability issues. At the time of writing they report that since 2000, 948 large scale land deals have been concluded (large scale means land of 200 hectares or over) concerning over 35m hectares of land, roughly the size of Germany. Africa has been the target of many of these deals, with over 50% being on the continent.

While past returns have been high, it is widely recognised in finance that this is far from a guarantee that future returns will be similar. What are the future prospects of holding land? Are investors blindly following historic trends? Probably not; there are many reasons to suspect that high rates of return are likely to persist.

Figure 1

so will the other. Investing in uncorrelated assets therefore reduces risk, by ensuring that not all of your investment falls prey to the same negative shocks. Figure 1 shows how weak the correlation is between farmland and the US stock market. Second, land has made returns far above those that can be obtained by investing in standard asset classes. Figure 2 compares the percentage

Figure 2

return (as calculated by the NCREIF) from holding farmland and US stock market indices. An average annual return of 13.2% may seem unreachable for many investors in the current climate, yet that is what holding farm land has yielded in recent times.

What’s more, food prices have not just been increasing, but also increasingly volatile. This has given any company that trades in commodities the incentive to purchase the land the commodity depends upon. This “vertical integration” removes price risk from the companies’ consideration; they no longer buy, but own the means of production. In addition, policies in the west aimed at mitigating greenhouse gas emissions have put a large focus on biofuels, because of their potential to reduce our reliance on fossil fuels. EU states in particular are committed to increasing the proportion of biofuels in the mix of fuels used for transport and industry. The Renewable Energy Directive and Fuel Quality directive assure investors that demand will continue to rise. Biofuels are highly land intensive, meaning large swathes of land are needed to produce any significant amount of fuel. This adds to the competition for land, thereby increasing its value. While these factors are perhaps the most significant drivers of increased demand, they are by no means the only contributors. Concerns over access to water, and encouragement to invest in developing countries from institutions such as the World Bank also play a role. How should we view these huge land acquisitions? Are they uprooting communities, jeopardising food security and putting lives at risk? Or could they provide benefits, such as having more employment opportunities and higher levels of productivity,


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which allow for an increase in income? Economics of land grabs for the poor Income and food security are perhaps the most important issues, and have been a big focus of many NGOs concerned with the effect of land grabs. The land involved in the deal might have contained natural resources that locals could have used to create marketable products, or have been farmed by the locals to obtain food crops. This source of income is eliminated if the land deals mean they no longer have access to these resources. In addition, the overall supply of food in the area could be restricted; often once the land is bought it is used to export cash crops to the West, such as coffee or tea. This might mean that the price of food in the area will rise. However, the effect on food security is not necessarily negative. The new land owners will often need labour to attend to the land. The jobs created on plantations, and in supplier firms could provide an income much greater to that which was previously attainable by the locals, due to differences in productivity. Locals would usually have struggled to achieve returns to scale on their small-holdings; traditional methods can suffer from low yield; and farmers’ access to inputs such as fertilizer is restricted due to lack of capital. Therefore if new owners can afford to bring in expertise, invest in the land and exploit scale efficiencies, then the marginal product of labour will increase, allowing for greater wealth creation. We must remember that these gains are not inevitable. Although there is huge scope for investment to raise productivity in Africa to the benefit of its inhabitants, it must be acknowledged that much of the land is bought purely speculatively, without any intention of improving its productive capacity. These situations are likely to be disadvantageous for locals. They will not only decrease access to land and resources for communities, but also inevitably fail to reap any benefits such as boosting employment.

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to the continent. Any investor planning to develop land for exporting produce will also have incentives to ensure that roads are improved, which could help other local businesses. The governments that wish to attract such investment will have to prioritise such infrastructure spending. Broadly speaking infrastructure provision is likely to have a positive effect, but the communities won’t be the main beneficiaries. They may have better access to roads, but these are likely to be built solely for facilitating the transport of goods to the coast - not providing access to local markets and services for locals, which is arguably important for regional short term growth. The evidence Given all of these complications and conditions, what is really needed is a body of high quality evidence which takes into account all of the potential costs and benefits. Sadly, this is something we are currently lacking. The economist Carlos Oya completed a broad, scoping review of all of the literature on land acquisitions, in an attempt to answer the above questions (Oya 2013). 170 studies were found and reviewed pertaining to land acquisitions, with the aim of finding studies that were considered rigorous. His findings are best expressed in his own words:

“The review could not find a single study… presenting an evaluation of impact with a rigorous baseline and a before and after comparison.”

The concept of transitioning to bigger plantations is part of the agricultural model in Brazil, which shunned the “small is beautiful” approach championed by some NGOs. They have become a major exporter of several major crops, such as soya beans, due to a host of agricultural experts overseeing huge farming operations. In Brazil’s case, it’s arguably serving the people well. It can sometimes be the case that export crops don’t preclude food crops. In Northern Ghana, an export crop used for biofuel called jatropha was intercropped with maize that served the local community (Tanner, 2013).

Not one study was found that met the criteria of providing a rigorous qualitative assessment! Given the heated debate surrounding the issue this is surprising. This certainly doesn’t mean that the studies are useless, or that they don’t further our understanding of the consequences for communities. But they can only be considered indicative, and can’t give a comprehensive picture of the overall impact of land acquisitions. A second problem, that compounds the first, once again relates to the vast majority of studies that have been carried out. A report from the think tank the ‘Overseas Development Institute’ states: “it can be challenging to establish how far individual contributions reflect researchers’ positions on these wider debates rather than identified impacts from large scale land acquisitions” (Locke Henley 2014). Land acquisition is a politically sensitive issue.

Another potential benefit is the development of infrastructure. Infrastructure is woefully inadequate in Africa, and given the breadth of the country, the cost of moving around goods can be staggeringly high. This is one of the reasons that Brazil is becoming an agricultural super power and Africa isn’t, despite some of the similarities Brazil has

Some, like the campaign group ‘World Development Movement,’ suggest similarities with colonialism, dubbing land acquisitions as “the new scramble for Africa.” Others simply believe that smaller farms are preferable. As the above quote says, it’s hard to judge how much opinion is informing the studies, especially given the lack of quantitative assessment.

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Although there have been no studies with a focus on employment or overall food security, there are many case studies which document how the land deals are perceived by those affected. Broadly speaking, they paint quite a negative picture. Evidence from the land matrix reveals that there are very few occasions when communities have been adequately consulted. Without such consultation it’s hard to imagine investors knowing what impact is being had, and how to mitigate it (Anseeuw, 2012). Consequently, the information that exists on compensation levels suggests they have been low. Case studies also indicate that it is often the government that sells off the land to investors, without consideration of who inhabits the land. In general “free prior informed consent” is lacking. Therefore, although we can’t say much – if anything – about the broader, long term effects, the evidence we do have suggests to this writer that it would be callous to adopt a neutral position on land grabs. The case study referred to at the beginning of this article demonstrates why. The economic impact – which itself is ambiguous – is simply one side of the story. Maybe the farmers from the Kigoba region in Uganda will be better off in the long run, able to work for the British company and earn a living from more productive labour (although the Oxfam report suggests this has not been the case). But this doesn’t justify the trauma of having their homes burnt down, or the violence they reportedly experienced. Growth or Development? This raises a broader point about development. Easterly, the economist referred to at the beginning, has recently published a new book outlining his concern about how development is often undertaken. “The Tyranny of Experts” argues that our focus on finding technocratic solutions to boost growth has too often overlooked the rights of the poor. In the book he discusses the Ugandan villagers who were evicted. He invites the reader to imagine: what if the evicted farmers were not in a far-away developing country, but in rural Ohio? It’s easy to imagine the outrage that would ensue. Another central tenet of the book is that rights are not only important in themselves, but also necessary for the kind of sustainable growth that will really benefit the poor. Easterly contends that improvements in political and economic rights are associated with improvements in economic outcomes. Incentives to cultivate and invest are dramatically reduced if there’s a risk the state will appropriate your land. Land grabs are therefore symptomatic of an attitude that hinders real development, according to Easterly. In summary, it is likely that land will remain an attractive investment in the near future. We should be sceptical of some of the claims made

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about ‘land grabs’ as the economic implications are still disputed and uncertain. While this may begin to change given the considerable interest the topic has generated, further research is likely to be beset by problems familiar to development economists; reliable data is limited and there are many conflating factors that complicate finding ‘ceteris paribus’ effects. Nevertheless, we should be concerned about any activity that seems to disregard the rights and customs of local communities. Economic growth is a wonderful thing that has the potential to alleviate poverty. It is, however, just one factor that contributes to development. Other elements, such as secure livelihoods, property rights and freedom to access the land that has been used by your family for years, are also important. To lose these, even at the expense of economic growth, might not be a price worth paying.

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References

Oxfam Briefing Paper (2011) “Land and Power – The growing scandal surrounding the new wave of investments in land” http://www.oxfamamerica.org/static/ oa3/files/bp151-land-power-rights-acquisitions-220911en.pdf

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Locke & Henley (2014)“Topic Guide: Land” Evidence on Demand http://www.evidenceondemand.info/topic-guideland - Briscoe J. (2014) Interview for Global Prosperity Wonkcast http://www.cgdev.org/blog/interview-john-briscoewinner-2014-stockholm-water-prize

http://www.landmatrix.org/en/ The clock has now gone, although Easterly was less than satisfied with the response from the WB http:// williameasterly.org/bankclock/ Moss T. & Thuotte R. (2013) “Nowhere Left to Hide? Stock Market Correlation, Regional Diversification, and the Case for Investing in Africa” – CGD Working Paper 316 http://www.cgdev.org/publication/nowhere-left-hidestock-market-correlation-regional-diversification-andcase-investing Figure 1 and Figure 2: http://www.highquestpartners.com/ userfiles/files/AgLand_Investing.pdf

Tanner, C. (2013) Large-scale Land Acquisitions and Food Security. UK: Evidence on Demand Oya, C. (2013) ‘The land rush and classic agrarian questions of capital and labour: a systematic scoping review of the socioeconomic impact of land grabs in Africa’, Third World Quarterly, 34:9, p1532-1557 Anseeuw, W., Boche, M. & Breu, T. (2012) ‘Transnational land deals for agriculture in the global south: analytical report based on the land matrix database’, The Land Matrix Easterly 2014 “The Tyranny of Experts; Economists, Dictators, and the Forgotten Rights of the Poor” Basic Civitas Books

Europe & the Eurozone - A lesson for Africa as is tends towards monetary union Justin Beresford Economics (BSc Economics, ‘14, The University of Nottingham)

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..hen Mundell offered his first contribution to the theory of the Optimum Currency Area he worried that his work risked being seen as a purely academic exercise, outside the realm of political feasibility (1961). If the criticism did not hold at the time, it certainly does not today. As the world becomes increasingly interconnected, his work has become increasingly relevant and prevalent. The creation of the Eurozone was a project of enormous political scope and more recently the Scottish independence movement has opened debate on the benefits of monetary union between Scotland and the rest of the UK: Mundell’s theory will again be highly cited.

2028. The lessons from the euro-project are far ranging and it will be essential that these are noted and duly appreciated.

Turning to Africa, the theory is arguably of even greater relevance. Approximately 400 million Africans in 29 countries currently live under currency union and more is proposed for the near future. Further, there is an eventual commitment to full African Monetary Union, with current expectation of implementation in

The Benefits of Union The benefits of currency union are clear, if not easily quantifiable. They reduce transaction costs and uncertainty; they increase transparency and competition. For the Euro, Baldwin et al (2008) provide a survey of the literature on the trade and FDI impacts

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This paper gives a review of the benefits and costs of currency union before drawing together the requirements of an optimum currency area proposed in the literature into four broad criteria. These are later discussed in the context of the African proposal in the form of concluding remarks.

400 million Africans currently live in currency union

of European currency union, concluding in confirmation of the perceived wisdom; the aggregate increase in trade and FDI due to the adoption of the Euro has been of about five percent. It is standard and universally accepted that an increase in trade of this magnitude is substantially welfare improving: as countries specialise in producing the goods in which they hold comparative advantage, they are better able to engage in mutually beneficial, productive exchanges. Efficiency improvements of this nature are beneficial to both citizens and firms alike. The Costs of Rigidity The costs of currency union come through the loss of flexible monetary policy. These costs are direct and far easier to measure, but following Mundell’s intuitive explanation offers the simplest outline of the enormity of this cost, which arises in the face of asymmetric shocks. Suppose there are two economies A and B, both at full employment and Balanceof-Payments equilibrium. These economies can be thought of as states, countries or even larger


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geographical regions such as northern and southern Europe. A and B produce different goods, but increase their welfare through trade with each other. Should an exogenous shock hit the system as a whole, lost flexibility does not pose a problem: the economies rise and fall together. However, suppose next that there is a shift in demand from country A’s goods to country B’s – an asymmetric shock. In this case, the resultant effect varies significantly depending on exchange rate variability. Under currency union, the shift in demand from A to B creates unemployment in country A and the new found demand puts upwards pressure on prices in B. If inflation is allowed to rise, this relieves some of the pressure from A, but if they are not, the full burden of adjustment is placed on A. In order to regain competitiveness, A must go through a period of painful internal devaluation in which unemployment rises and wages fall. Alternatively, if A pursues a full-employment policy but prices are allowed to rise in B, then the full cost of adjustment is born by B through very high rates of inflation. Mundell argues that in the face of asymmetric shocks, currency union generates either a recessionary or inflationary tendency, dependent on policy, but that this is a potentially significant cost in either case. Next we contrast this with the effect of the same exogenous demand shift, but born between countries A and B under variable exchange rates. Here the shift in demand places the same pressures on unemployment in A and prices in B, however depreciation of A’s currency relative to B’s relieves both from their respective burdens of adjustment. A becomes relatively more competitive through currency devaluation and so does not need to suffer from a painful period of internal devaluation. Similarly, B’s currency appreciation dampens the demand shift and it does not suffer from prolonged periods of high inflation. Clearly then, the advantages of currency union must be traded off against the very

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high potential costs, and so the purpose of optimum currency area theory is to understand how big a currency area can get before the risk of asymmetric shocks outweighs the benefits of union. This paper next considers the requirements for an optimum currency area as proposed by Mundell (1961), grouping these into four broad criteria. The criteria, discussed below in the context of African union are proposed as: (1) similar business cycles; (2) price and wage flexibility; (3) high factor mobility, and; (4) fiscal and political union.

The Criteria 1. Similar Business Cycles The first condition relates most directly to the problem of asymmetric shocks; if two regions are interconnected enough to share similar business cycles the likelihood of asymmetric shocks is immediately reduced. Avoiding asymmetric shocks is inevitably the best way of dealing with them and so this is arguably the most important requirement.

2. Price and Wage Flexibility In the same direct manner, price and wage flexibility allow regions to weather asymmetric storms. Returning to our two country example, if A has an ability to withstand some wage deflation whilst B is willing to tolerate higher levels of inflation, then the adjustment burden can be shared, better managed, and reduced in cost. 3. High Factor Mobility Although capital mobility is evidently necessary, Krugman (2012) argues that of the standard factors, labour mobility is ‘surely the one

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that matters’. Labour mobility provides an alternative to the pain of internal devaluation; when demand shifts from A to B, wages fall in A and rise in B, but through an induced flow of labour – from A to B – the inevitable forces of demand and supply can realign an income differential. This has proven to be a key difference between the US and the Eurozone, given that language barriers between European countries do not allow anywhere near the level of labour mobility as that which is evidenced in the US.

4. Fiscal and Political Integration In this final criterion, political union is suggested primarily as a tool for fiscal integration. Again the automatic transfer mechanisms present in the US, but not the Eurozone, evidence the importance of these mechanisms. When a state in the US suffers from an adverse asymmetric shock, the nature of the Federal system provides an automatic transfer mechanism, as it pays relatively less into the national budget. Equally, positive shocks lead to increased payments into the Federal budget and this provides an automatic inter-region stabiliser which was not present amongst Eurozone countries. At least not until far too late, whence bail-out rather than stabilisation had become the intended outcome. Not included in the above, but also essential for monetary union, is the existence of a lender of last resort. This is an important European lesson for Africa and De Grauwe (2011) argues that this was a crucial design flaw in the Euro prior to the crisis. He argues that in the normal case, a government and central bank hold each other in a ‘deadly embrace’ (De Grauwe; 2013) and because they realise this – and, importantly, investors realise that they realise this – neither is able to let the other go bust. The introduction of the Outright Monetary Transaction (OMT) programme in 2012 corrected for the omission, but it had meant that perceived risk was far higher in Eurozone countries relative to non-Euro, European countries: despite similar economic outlooks 10-Year bond rates were 1.7% and 6.6% in the UK and Spain respectively in 2011. OMT

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was essentially a promise that the European Central Bank would act as a lender of last resort to any of its member countries, and this has since been celebrated as a turning point in the Euro Crisis (Steen; 2013).

to shocks does however show symmetry and correlations of lagged shocks also show symmetry in trade patterns. This, they suggest, means that political and fiscal

Current Unions CEMAC Angola, Burundi, Cameroon, Central African Republic, Chad, Republic of the Congo, DR Congo, Equatorial Guinea, Gabon, São Tomé and Príncipe

shocks. With so many living below the poverty line, this should not even be entertained. Finally the ultimate European lesson is to beware the costs of ignoring optimum currency area theory. To Proposed Unions paraphrase, Mundell was EAC Burundi, Kenya, Rwanda, Tanzania, Uganda right. And his theory is now taking its revenge (Krugman; 2012).

African Application Despite the Euro crisis there seems to be strong appetite for currency union in Africa. References Over the next decade the five Baldwin, R. E., et al., (2008) Benin, Burkina Faso, Cape countries of the East African UEMOA Benin, Burkina Faso, ECOWAS ‘Study on the impact of the Cape Verde, Gambia, Verde, Gambia, Ghana, Community (EAC) aim to adopt Ghana, Guinea-Bissau, Guinea, Guinea-Bissau, euro on trade and foreign direct a shared currency, whilst the Ivory Coast, Liberia, Mali, Ivory Coast, Liberia, Mali, investment.’ European Economic Niger, Senegal, Sierra Niger, Nigeria, Senegal, existing UEMOA countries aim and Monetary Union Working Leone, Togo Sierra Leone, Togo to expand their membership Paper 321. and adopt a new currency Buigut, S. K., Valev, N. T., (2005) ‘Is the proposed within the next few years. In the longer term integration – the fourth criterion – could lead East African monetary union an optimal currency there is commitment to full Euro-style African to ‘more favourable conditions’ for the EAC area? A structural vector autoregression analysis.’ Monetary Union before 2030. proposal. World Development, 33(12), 2119-2133.

The conclusions on monetary union vary significantly between current unions and future proposals. UEMOA has been widely celebrated as a success: UEMOA now boasts more intraregional trade than any other region of Africa (Goretti and Weisfeld; 2008). However, even for this relative success story a violation of the first criterion, similar business cycles, has meant that many countries suffer from the ‘wrong rate’ of interest (The Economist; 2013) since a one size fits all policy is impossible. This has caused a drag on growth; the recessionary tendency warned of by Mundell, above. As the EUMOA expands into the ECOWAS, the addition of new countries will exacerbate the problem; the addition of oil rich Nigeria in particular, which moves counter cyclically relative to its oil importing neighbours. The econometric findings of Buigut and Valev (2005) on the East African Community (EAC) proposal are also negative. They conclude that both supply and demand shocks tend to be asymmetric, again in violation of the first necessary criteria for monetary union. Their further analysis into the speed of adjustment

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It is clear that these conditions are not upwards scalable in so far as where the EAC or ECOWAS proposals are not optimal, full African Monetary Union certainly cannot be so. Having discounted the future proposals

De Grauwe, P., (2011) ‘Design Failures in the Eurozone: Can they be fixed?’ Working paper, LSE De Grauwe, P., (2013) ‘The European Central Bank as Lender of Last Resort in the Government Bond Markets.’ CESifo economic studies 59.3: 520-535. Mundell, R. A., (1961) ‘A theory of optimum currency areas.’ 51: 65765. Weisfeld, H., Goretti, H., (2008) ‘Trade in the WAEMU: Developments and Reform Opportunities.’ International Monetary Fund. Electronic Sources The Economist (2013) ‘Currency unions in Africa: ever closer.’ Available at: http://www.economist. com/news/finance-andeconomics/21591246-

based solely on the first, albeit most important, criterion this paper has neglected to discuss another important violation. In a continent where an estimated three thousand native languages are spoken and transport links are notoriously poor, labour mobility is significantly lower than in Africa’s European or American counterparts. Under African Monetary Union, price and wage flexibility will become the only adjustment process available in the face of regular asymmetric

continent-mulls-merging-currencies-ever-closer Krugman, P., (2012) ‘Revenge of the Optimum Currency Area’ New York Times. Available at: http:// krugman.blogs.nytimes.com/2012/06/24/revengeof-the-optimum-currency-area/?_php=true&_ type=blogs&_r=0 Steen, M., (2012) ‘Draghi acts to keeps euro crisis at bay.’ The Financial times Available at: http:// www.ft.com/cms/s/0/2597e96c-f2d9-11e2-a20300144feabdc0.html#axzz2yEtRCMNx


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Can Exercise Improve Academic Achievement? Kate Powell (BSc Economics, ‘14, The University of Nottingham)

Kate Powell discusses the findings from her Bachelor’s dissertation. The prevalence of obesity around the world is rising. In England, levels have risen from 13% to 24% of men and from 16% to 26% of women from 1993 to 2011 (Health and Social Care Information Centre, 2013). As a result, there is increased focus on the role of physical activity among adolescences, in particular within the academic environment, where many health organisations are advocating increased participation in daily Physical Education (P.E.) within schools. At the same time, schools are experiencing increasing pressure from governments to improve academic achievement in national exams. Consequently, there has been a tendency for school to reduce hours of timetabled P.E. to facilitate an increase in time and resources employed in academic studies. In the US, participation in P.E. amongst high school students declined from 41.6% to 28.4% between 1991 and 2003 (Lowry et al., 2005). The question is; will this reduction in P.E. lead to improved academic performance? A recent body of literature has been sparked, investigating the relationship between these variables. Unfortunately, study results are contradictory. Several studies have shown that reducing P.E. will have negative implications on educational outcomes due to the positive effect that exercise can have on increasing concentration and improving classroom behaviour (Nevill & Stead, 2010, p.20), which are both likely to improve

academic achievement. Nonetheless, other studies report weak or no evidence of the association. I therefore decided to undertake a study to investigate the effects of exercise on academic performance among students at the University of Nottingham (UoN), due to the disparity in the literature. The study tested whether such a relationship was spuriously determined by an individual’s self-motivation, which existing literature has tended to omit. A dataset was first created from responses to an online survey distributed to third year students at UoN. The final dataset contained 14 time-invariant variables and 3 time-varying variables. Participants provided 4 values for the time-varying variables; average degree mark, average exercise participation and average attendance, which corresponded to semester 1 and 2 from years 1 and 2. This allowed a four period panel dataset to be created. Due to the small sample size, the study can only be considered a pilot.

In the US, participation in P.E. amongst high school students declined from 41.6% to 28.4% Two time-invariant variables in the dataset that are important to mention are UCAS (UCAS points achieved prior to commencing university) and dMathset (Mathematics set when aged 13). These variables were included

to proxy for the student’s unobserved current and cognitive abilities, respectively. Aged 13 Mathematics set was used as the relationship between cognitive function and academic performance has been proposed to decline with age due to the impact of social and environmental factors (Kaufman et al. 2012, p.2). Hence, academic success at age 13 was thought to represent natural ability more accurately than success at an older age. For the purpose of the study, key variables were defined. This was done to reduce potential misinterpretation by participants, which could have reduced the precision of the estimates. For example, academic achievement can refer to any outcome of education. However, there is a focus solely on exam performance, measured by the average semester mark achieved by students whilst studying at UoN. Exercise is defined as planned or structured forms of physical activity and measures exercise participation by average hours undertaken per week, per semester. The third key variable, self-motivation, defines an individual’s motivation to succeed due to his or her own interest. Behavioural testing is a popular measurement technique, yet unfortunately it requires significant time and resources and was therefore an impractical option for this study. Instead, a self-control was used to proxy for selfmotivation following intuition provided by Trope and Fishbach (2000). These authors suggested that more motivated individuals exert greater self-control when participating

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activities that incur short-term costs, as this allows them to sustain participation and gain the long run benefits. This intuition was appropriate for the study given that both academic achievement and exercise yield short run costs and long-run benefits. To devise a corresponding measure of self-control, focus was based upon Strotz’s (1956) model of consistent planning. The model states that individuals maximise their utility when they demonstrate consistent preferences. Therefore, a time-inconsistent preference represents a choice opposing the individual’s self-interest, but it is chosen because they lack the self-control required to overcome the temptation of immediate reward. Ashraf, Karlan and Yin (2006) identified timeinconsistent preferences using hypothetical timediscounting questions relating to financial rewards in two time frames (a ‘near-term’ and a ‘distant’ frame). The same model was followed for this study, identifying participants as having time-inconsistent preferences if, given a choice of a smallerearlier reward or a larger-delayed reward, they chose differently in the two time frames. To assess the association between exercise participation and academic improvements, the following model was constructed: AvMarkit = β0 + β1Exerciseit + β2Attendanceit + β3Agei + β4UCASi + β5Alcoholi + β6Cigarettesi + δ1S2t + δ2S3t + δ3S4t + δ4Femalei + δ5NonBritishi + dFacultyiδ6 + dMathsSetiδ7 + dFatheriδ8+ dMotheriδ9 + δ10PrivateSchi + δ12PracticeReligi + νit where νit is the error term and variables in bold represent matrices of dummy variables; dFaculty represents faculty of study, dMathsSet represents maths set aged 13, dFather represents father’s occupation and dMother represents mother’s occupation.

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The main variable of interest was Exerciseit. The chosen hypothesis stated that students who undertook more hours of exercise would achieve higher average marks in their degree. This was based on the view that the health benefits produced from exercising, such as increased cognitive function or reduced stress, are positively correlated to academic performance.

However, the possibility of an individuals’ self-motivation spuriously determining the relationship between exercise and academic achievement could not be ignored. Further regressions were therefore conducted, in which self-motivation as a control variable in regressions on academic performance, and exercise participation were included. As time-inconsistent behaviour suggests a lack of self-control (Strotz, 1956; Ashraf et al., 2006) and thus a lack of self-motivation (Trope & Fishbach, 2000), testing the importance of selfmotivation was equivalent to examining the significance of time-inconsistent preferences in the regressions. Although the time-preference survey questions created two time-inconsistent variables, namely hyperbolic and patient-impatient preferences, analysis was focussed upon the partial effect of hyperbolic. This is because the reversal of preferences in the other direction (patient now but impatient later) is thought to principally represent noise (Ashraf et al., 2006, p.649). It was hypothesised that lower motivation reduced the likelihood that

a student could overcome short-term costs associated with studying or exercising, and therefore the coefficient on Hyperbolic would be negative, reducing average marks and exercise participation. To estimate the primary model, which analysed the relationship between exercise and academic performance, three techniques were used: pooled OLS, Random Effects (RE), and Fixed Effects (FE). Under Pooled OLS, the estimated coefficient on Exerciseit was -0.029 and insignificant at even the 10% level. This led not only to the rejection of the hypothesis that exercise and academic performance were positively related, but forced rejection of the view that these two variables were even related at all. However, due to the use of panel data, the high possibility of serial correlation between the errors made this conclusion too hasty. By conducting the (more appropriate) RE and FE models, it was found that the marginal effect of Exerciseit was indeed positive and statistically significant, suggesting exercise participation does aid degree performance. The estimated coefficients under the two models differed slightly, 0.221 under FE compared to 0.151 under RE, however a Hausman test identified the RE estimates as those preferred. Another interesting result from the estimated model was that of the high economic and statistical significant of practicing a religion, which, under RE, had a coefficient of 3.026 and significant at the 10% level. This estimate supported a body of literature proposing a positive association between academic performance and religiosity due to the higher conscientiousness and greater emotional wellbeing religious commitment can promote (Jeynes, 2003). However, it may also indicate endogeneity of the PracticeReligi variable. Loury (2004), for


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example, suggests that parents of students who practice a religion may systematically differ from other parents in the extent that they supervise their children’s activities or the amount of time they spend with their children. If it was these traits that determined the student’s academic achievement rather than their religious commitment, then the results were biased. Instrumental variable estimation could provide a possible solution to this problem. Assessing the importance of selfmotivation in the determination of academic performance and exercise participation led, disappointingly, to inconclusive results. In the regression on academic achievement, Hyperbolici (and thus self-motivation) was found to have the expected negative sign but was insignificant, leading to the rejection of the hypothesis that self-motivation affects average degree mark obtained. In the regression on exercise participation, the opposite result arose. Hyperbolici was found to be significant at the 10% level but had the opposite sign to that hypothesised, namely self-motivation was found to reduce exercise undertaken. When considered together, these results implied that self-motivation was affecting exercise participation but not academic performance, and thus it was unlikely to be a confounding variable in the initial relationship. This conclusion was strengthened by the persistence of the positive association between academic performance and exercise participation even when self-motivation was added to the model. However, it is important to note that this result is weakened if, as proposed by Ashraf et al. (2006), financial time-preferences (as used in this study) are correlated with cash flow. In such a case, individuals may have identified themselves as impatient now but patient later (hyperbolic) if they held low financial stock when completing the survey but expected it to increase before the future time frame. This would imply endogeneity in the time-preference dummies. This insight seems relevant to this study given that the survey was conducted around the same time that student loan and grant

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payments were released. If the variation in self-motivation in the dataset was determined by whether the student had already received a loan or not, then the insignificant result is likely to be inaccurate.

References

Nonetheless, this study has gone some way to explaining academic performance at the University of Nottingham. Higher academic achievement was found to be associated with greater exercise participation, after controlling for many individual characteristics, and was robust to the measure of self-motivation used.

Health and Social Care Information Centre. (2013). Statistics on Obesity, Physical Activity and Diet - England, 2013. Retrieved February 6, 2014 from http://www.hscic.gov.uk/catalogue/ PUB10364

“more motivated individuals exert greater self-control when participating activities that incur short-term costs, as this allows them to sustain participation and gain the long run benefits” The effect of self-motivation on this relationship was unfortunately unclear. When using self-control as a proxy, self-motivation was positively but insignificantly related to academic achievement but negatively and significantly associated with exercise participation. These inconclusive findings may however be driven by the limitations of the study. In addition to the small sample size mentioned, sample selection bias may also be a concern because students with more time available to complete the study may be from a more intelligent student subgroup given that they may require fewer study hours than less intelligent students. Whilst the overall findings of this study do not provide causal inference, the association found between academic performance and exercise participation may have important policy implications at the national level. In particular, they weakly support the notion that schools should increase Physical Education class time and may advocate policies for compulsory exercise at higher levels of education.

Ashraf, N., Karlan, D., & Yin, W. (2006). Tying Odysseus to the mast: Evidence from a commitment savings product in the Philippines. The Quarterly Journal of Economics, 121(2), 635672.

Jeynes, W. (2003). The effects of religious commitment on the academic achievement of urban and other children. Education and Urban Society, 36(1), 44 -62. Kaufman, S., Reynolds, M., Liu, X., Kaufman, A., & McGrew, K. (2012). Are cognitive g and academic achievement g one and the same g? An exploration on the Woodcock–Johnson and Kaufman tests. Intelligence, 40(2), 123-138. Loury, L. (2004). Does church attendance really increase schooling? Journal for the Scientific Study of Religion, 43(1), 119-127. Lowry, R., Brener, N., Lee, S., Epping, J., Fulton, J. & Eaton, D. (2005). Participation in High School Physical Education, United States, 1991–2003. Journal of School Health, 75(2), 47-49. Nevill, M. & Stead, R. (2010), The impact of physical education and sport on education outcomes: a review of literature, Institute of Youth Sport. School of Sport, Exercise and Health Sciences. Loughborough University. Retrieved February 3. 2014, from https://secure.ausport. gov.au/__data/assets/pdf_file/0010/456904/ Nevill_-_Literature_review_Impact_of_PE_and_ sport_on_education_outcomes_Oct_2010.pdf Strotz, R. (1956), Myopia and Inconsistency in Dynamic Utility Maximization. The Review of Economic Studies. 23(3), 165-180. Taras, H. (2005). Physical activity and student performance at school. Journal School Health, 75(6), 214-218. Trope, Y. & Fishbach, A. (2000). Counteractive self-control in overcoming temptation. Journal of Personality and Social Psychology, 79(4), 493–506.

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The Influences of Student Satisfaction in UK Higher Education Amos Teshuva (BSc Economics, ‘16, The University of Nottingham)

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..he key purpose for the NSS is to provide ratings for course satisfaction across all Universities. An important subject yet to be addressed is which factors have the largest influence on a Universities NSS score, for example do school or faculty’s finances have a bigger influence than total number of teaching and research staff? Without a study addressing such questions, Universities have no evidence to guide them when looking to improve their NSS score. Hence the results of this study may have important implications for Universities future tactics when looking to improve NSS score. The aim of this paper is to illustrate the most important influencers of NSS performance. More specifically this study will address the following two questions: • Which variables have the most significant impact on a Universities’ performance in each of the different sections of the NSS? • Which variable has the most significant impact on a Universities’ overall performance in the NSS? Solving these two questions will highlight what the main determinants of student satisfaction are – according to the NSS – for UK Higher Education. Analysis of NSS literature Before analysing the relationship between the NSS and chosen independent variables it is important to decipher the reliability of the NSS and the extent to which it acts as a good indicator for student satisfaction. The only public paper focussed specifically on the NSS and its reliability is by Cheng and Marsh (2010). They found that the variance components were highly statistically significant and highly reliable. This claim was predicated by the high sample size with over half the students from the HE sector taking this survey. Cheng and Marsh also found

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that there was greater variance of NSS scores in the same schools at different institutions than overall between universities. They highlight two reasons for this; firstly due to systematic differences between the same courses taught at different institutions. The second being these differences are larger when more questions are taken into account as opposed to institutional averages. At first glance this would indicate that the NSS is a reliable source of data and it would be beneficial to focus on certain schools or faculties within an institution due to their higher variation in NSS score, as oppose to institutions overall score. However there are challenges worth raising with regards to the findings of this paper.

NSS scores are a better indicator of Universities’/Schools’ performance than teaching quality, assessment and feedback Firstly Cheng and Marsh (2010) reiterate how robust their statistics are due to the large sample sizes. The sample sizes decrease dramatically when you compare schools or faculties, this means that although the variance is higher the reliability of the data is much lower. Therefore I must be conscious to pick schools or faculties which have the largest student bodies, giving my regressions the best opportunity to be reliable. I may need to combine two schools or faculties from each institution to make a valid comparison. Another contention is more a limitation of the study than a flaw. The study only assessed NSS scores for 2005-2006 and found scores were quite stable. Over a longer duration of time NSS scores are likely to be less stable due to; lecturers changing, the introduction of £9,000 fees influencing student expectations

and other factors. Considering this is the only paper on the topic there is little guidance for this paper when focussed solely on the NSS but there is copious literature with regards to other Student Evaluations and relevant forms of econometric analyses. Students’ Evaluation of teaching in Higher Education: Marsh and Roche (1997) highlight the common theme across a plethora of analyses of SETs is that teaching is multidimensional (Abrami et al. 1991; Cashin et al. 1992; Feldman., 1997; Marsh & Roche., 1993). Therefore it is important that any model analysing SET scores are multifaceted. The most highly supported model for multidimensionality of SETs is the Students’ Evaluation of Educational Quality (SEEQ) instrument (Marsh, 1983, 1984, 1987; Marsh & Dunkin, 1992). The NSS is based off this model and adds a multilevel perspective; at the bottom level students are nested in departments and a level upwards departments are in Universities (Marsh et al., 2002). Thus NSS results should act as a suitable conduit to measure student satisfaction as it was created based off more classical SETs. There are however two contrasting views regarding SETs and the NSS which are worth highlighting. Cheng and Marsh (2010) purport that overall NSS scores are a better indicator of Universities’/Schools’ performance than questions regarding specific themes e.g. teaching quality, assessment and feedback etc. This contrasts with the view taken by Frey (1978) that overall scores for SETs should be excluded as they may be more susceptible to circumstance, temperament and other potential biases compared to detailed questions. Considering their contrasting views this paper will include 7 regressions which focus on specific sections of the NSS and one regression incorporating all 22 questions. This will allow for a more thorough analysis and could also highlight if


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one variable is particularly important when an institution is looking to improve its overall NSS score. Having established the NSS is a reliable survey which will accurately measure student satisfaction we now move to the literature focussed on the relationship between student satisfaction/performance and other variables. A paper by Chan et al (2005) aimed to quantify the determinants of satisfaction for University of Western Australia students. The paper uses a far smaller survey (1300 responses) than the NSS but uses a linear regression model with satisfaction – determined using a 1-5 Likert scale akin to that of the NSS - as the independent variable and several dependent variables such as; grades achieved and relationships developed. This paper only runs the regression for 1 school in 1 university across 1 year and admits this is a limitation of the study. That NSS data is available for several years and I have data on the Russell Group I will run my regressions using panel data to not suffer the same limitation. Feldman (1983) reported that SET scores are negatively related to age and years of teaching experience. One would assume after a couple of years lecturers would be more comfortable in their teaching style and receive the biggest increase in their SET/ NSS scores. Ferguson (1991) assessed the performance of 2.4 million students with the aim to improve the allocation of resources for schools in Texas. Ferguson (1991) found it took 5 or more years of teaching experience before a noticeable improvement in class test scores. Considering the studies’ incredible sample size and its coverage from ages 7 to 17 I believe this to be stronger evidence than Feldman’s paper which found the negative relationship between SET scores and teaching experience from the first year of teaching. In addition to this Ferguson (1991) also found that smaller classes had a positive effect on student performance. This finding was reinforced by Marsh and Roche (1997) who analysed several key papers on student performance. Although it is intuitive that a smaller class size leads to better performance it may not be the classes’ size affecting performance. If students in higher income families attend schools that have

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on average a smaller class size compared to schools with lower income families Ferguson’s suggestion may be due to a failure to account for the direct effect of family income on student performance. Ferguson couldn’t separate the specific effect of each variable. Teacher quality is likely to be the biggest influencer of student performance/student satisfaction (Coleman et all., 1966). A study by Rockoff (2003) finds one standard deviation in teacher quality raises test scores in maths and reading by 0.20 and 0.24 standard deviations. Rockoff uses panel data to estimate teacher fixed effects while controlling for other influencers of student performance.

Smaller Classes have a more positive effect on student performance The fixed effects model may be applicable to my data as I will not have access to all potential influencers of NSS score. This will enable me to avoid any omitted variable bias. (Wooldrige., 2010) The Coleman report (1966) was the first major study (sample size over 500,000) correlating student performance with several key influences, teacher quality being the most important. However the study had some telling weaknesses; instead of assessing the quantitative effect a variable has on educational performance the report provides a statistical measure of the variable’s performance -namely its effect on the coefficient of determination or R2 of the regression - (Cain & Watts., 1970). This doesn’t enable the reader to create useful policy actions as a result. For my study I must focus on the quantitative effect a variable has on student satisfaction. If I am successful this model will be helpful for Universities when looking to improve their NSS scores. Secondly this study was the first of its kind to create a production function for student performance: Og = f (F(g), P(g), C(g), T(g), S(g), α) Where Og is the performance of a student in year g; F, P, C, T and S represent variables of family, peer, community, teacher and school inputs, respectively; α is ability; the superscript g shows all of the inputs are cumulative from birth to year g. However this production function can

only be created out of observable characteristics which provides limited information when assessing a variation in teacher quality (Hanushek., 2006). Therefore the production function may neglect intangible qualities that have the biggest influence on teacher quality. Hanushek’s critique will likely apply to my dataset but this study should still highlight valuable relationships worth noting. This criticism as well as challenges regarding the measurement of certain variables (Bowles and Levin, 1968; Kain and Hanushek, 1968); and the uneasiness about interpreting nonexperimental data have been expressed (Sewell, 1967 Nichols, 1966; Mosteller, 1967). Although this report had several interesting findings, the Ferguson study used a larger data set, has less methodological flaws and as a result is more reliable. This literature review has influenced the direction of my research in the following ways: I will compare the largest schools/faculties across different institutions to have noticeable variance coupled with reliable statistics. This study will use fixed effect linear regressions for each of the 7 sections of the NSS and a fixed effect linear regression incorporating all 22 NSS scores. Finally I must focus on the quantitative effects a variable has on student satisfaction not on the statistical measure of a variables performance. Empirical analysis We start by looking at the relationship of the independent variables with the 7 sections of the NSS. Due to the number of regressions this paper will focus on independent variables that have a significant relationship with the NSS 0-100 scale at the 5 % or 1% levels in the 6 of the 7 different regressions. Remember regressions 1-6 are normalised using Principle component analysis, while question 7 is not as it is comprised of only statement 22 (Appendix – NSS). Therefore for regressions 1-6 the worst performing school/faculty receives 0 and the best performing school/ faculty receives 100 with regards to performance in the NSS. To check whether my decision to use the Fixed effects model for my regression was correct I ran the Hausman test for all 7 regressions (Appendix – Hausman) and found the Fixed effects model to be appropriate. All 7 regressions suffered from Heteroskedasticity (Appendix- Heteroskedaticity) which I controlled for using robust standard errors.

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Before assessing the relationships between my independent variables and the varying dependent variables one may initially be drawn to my low R2 values for all 7 regressions. The R2 value refers to the fraction of variance explained by the model (Cameron & Windmeijer., 1995). Therefore one could argue my regressions don’t explain much of the variability of my response data around its mean. This can be explained due to my use of the fixed effects model for panel data. When calculating the explanatory power of the model (R2) there is no explanatory power assigned to the individual intercepts, the difference between this and time-series data is that I have variation across each school or faculty so my R2 is more similar to that of cross sectional data which tends to be low (Wooldrige., 2010). Also as I am not predicting what future NSS scores will be but focussing on the relationship between the NSS and independent variables thus the R2 value is not a fundamental statistic (Wooldrige., 2010). A one unit increase in “tostaff” causes a 0.104 unit increase in the normalised “Teaching on my course” rank, ceteris paribus. The staff variable is significant at the 5% level but not the 1% level. Using this coefficient ten additional staff members would lead to a 1.035 increase in the “Teaching on my course” scale. “tostaff” is significant at the 1% level for “Academic support”. Here an additional teaching only staff member has a 0.171 increase on the normalised “Academic support” rank. The only other regression in which “tostaff” was significant at the 5% level was “Personal development” where one more Teaching only staff member would lead to a 0.088 increase in the rank. The significance of teaching only staff for the “Teaching on my course section” of the NSS is easily explained; more staff who have teaching as their entire remit ought to allow schools/ faculties to share the teaching burden. This should mean more enthusiastic staff making the subject more interesting which overall should lead to a better quality of teaching (Skinner & Belmont., 1993; Patrick et al.,

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2010). It is surprising how low the coefficient is however. Considering the mean number of teaching only staff was 12.882 for 2012 one would expect a larger impact. This is perhaps

explained by the majority of staff in Russell Group institutions being teaching and research staff (The Russell Group., 2010). The relationship between “tostaff” and “Academic support” is likely to be explained by an increase in staff allowing greater accessibility between staff and students. Added interaction whether in person or otherwise can make a significant difference to whether a student feels well supported in their academics or not (Henard & LeprinceRinguet., 2008). The NSS statements (Appendix NSS) for “Personal development” refer to issues such as self-confidence and ability to communicate, if we accept the explanation that a more shared teaching burden leads to more engaged teaching staff then staff are likely to have a greater effect on students’ personal development when there are more of them. We now move to teaching and research staff to see if these small coefficients can be explained by the low number of teaching only staff. A one unit increase in “trstaff” causes an improvement in NSS rank of 0.0160 for the “Academic support” section, ceteris paribus. This variable is significant at the 1% level. The reasoning as to why more staff would improve the “Academic support” score of the NSS has been explained for the “tostaff” variable. However it surprises me to find that my explanation as to why there is a small effect of teaching only staff numbers on the NSS was incorrect. If my argument were to stand then the high numbers of teaching and research staff should have a more significant effect than “tostaff”. This not being the case inspires me to two potentially bolder propositions; firstly if we assume the Russell Group is a very well managed and organised group of Universities it is possible that these schools and faculties

employ an optimal number of staff for schools and faculties of their size. Therefore a one unit increase in staff who have teaching as part of their remit (“tostaff” and “trstaff”) has negligible effects on student satisfaction (Harris., 2007). Secondly if we take the results at face value it means that the number of staff who have teaching within their remit has little impact on NSS score. Before accepting the second proposition it is important to also look at the ratios between students to teaching only staff “ssto” and students to teaching and research staff “sstr”, as literature would indicate that staff to teacher ratios have a more prominent impact on student satisfaction than staff numbers alone (Ferguson., 1991; Marsh and Roche., 1997). Surprisingly the two ratios “ssto” and “sstr” hold no significant relationship with any of the 7 regressions at the 10% level. Granted there is no direct literature on the NSS’s relationship to student numbers and number of staff who teach but one would have expected a significant relationship. This could either consolidate the notion that the number of teaching staff have little to no impact on NSS score or could potentially be a weakness of my data set. The HESA data that allowed me to access Teaching staff and student numbers is broken down by faculty or school not by course. All relevant literature regarding the impact of teachers on student satisfaction/student performance are focussed on class size, whereas “ssto” and “sstr” simply show the ratios of teachers to students and not necessarily how many students are taught per teacher. This data does not reflect actual class size. An improvement for this study would be to acquire staff and student numbers by course as this would show the effect of class size on NSS score. This being said if we maintain our assumption that Russell Group universities are well managed and organised then one would expect their schools/faculties to distribute the teaching workload fairly equally among staff. If this is the case then my results are surprising, with the proportion of students to teaching staff having no noticeable effect on institutions’ performance in the NSS.


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The acceptance to application ratio “aar” does have some significant results. Given this is a ratio I interpret the effect of a 0.01 change in the number of accepted to the number that apply as a 1 unit change would be going from no students being accepted to all. A 0.01 increase in the “aar” leads to a -0.314 change in the normalised “Teaching on my course” rank, ceteris paribus. This variable is significant at the 1% level. This level of significance is mirrored in the “Assessment and Feedback” rank where a 0.01 increase in the “aar” causes a fall of 0.356 in the 0-100 scale, ceteris paribus. The acceptance to application ratio has a less pronounced effect on the “Personal development” rank where a 0.001 increase would cause a -0.252 change in the rank but only at a 5% level of significance. The fact that “aar” has a negative effect on NSS score contradicts my prediction that the more difficult it would be to get onto a course the higher student expectations would be which would lead to a lower NSS score. Here the easier it is to get onto a course the lower the NSS score becomes. One explanation could be related to the ability of accepted applicants as the “aar” ratio moves towards 1; if it becomes easier to get accepted into a school or faculty then the average ability of students is likely to fall, thus these students may be be more reliant on a school or faculty to help them succeed with their studies than a more able student who needs little support. If the school or faculty needs to spread resources more thinly among the new cohort of less able students than the previous more able group then students in need of support will receive less than past years. Therefore assuming expectations of both the more able and less able cohorts are the same, those less able students could give a lower NSS score than the previous year whereas the more able students who didn’t need as much support may be on average more satisfied with what was offered and score more positively. The log of students variable was expected to be significant, however it is statistically insignificant in any of the 7 regressions at a 5% or 1% level. This could be related to schools and faculties being at their optimal sizes as explained with regards to “trstaff”. The log of finances has a positive relationship with the “Academic support”

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and “Organisation and Management” ranks but a negative relationship with the “Learning resources” rank, all significant at the 5% level. A 1% increase in finances for a school or faculty leads to an increase of 2.041 on the normalised “Academic support” rank, while the same 1% increase would cause a 1.455 increase in the “Organisation and Management” rank. With a mean 70.197 an increase in a school or faculties finances by 4% would enable an institution to be in the upper quartile for this normalised ranking. However a 1% increase in finances would lead to a -3.165 fall in rank for “Learning resources”.

ranks is a lot simpler to explain. A larger budget related to teaching should and does in these cases lead to an improved rank as schools have more resources to invest in Academic support and any systems/controls they need to improve the management of the school/faculty. These effects may have been larger had a 1% increase in finances meant all additional finances went to improving Academic support for example, however these finances could have been distributed elsewhere which dampens their effect on the NSS.

The last result is the most striking and deserves attention; one would expect an increase in finances for a school or faculty to lead to improved results, particularly finances which are largely related to teaching costs. The HESA data set used to create the “lnfin” variable does not perfectly align with the statements students are asked to rank when filling out this section of the NSS. All other sections make statements that are directly related to a students’ experience in that school or faculty, however two of the three statements the student is asked to rank from 1 to 5 in the “Learning resources” section are related to the Universities library and IT services (Appendix NSS Q16 and Q17). This may explain why all other independent variables are insignificant in relation to the “Learning resources” section as these independent variables are related to schools or faculties.

We now look at the significance of the independent variables when normalising all 22 NSS questions together. The dependent variable “NSS” regression was created using principle component weighting with all 22 NSS questions. These were then scaled between 0-100 to allow clearer analysis.

However the negative coefficient of “lnfin” with the normalised “Learning resources” rank is till unexplained. I believe this to be related to both; statement 18 in the NSS questionnaire “I have been able to access specialised equipment, facilities, or rooms when I needed to” and my selection of schools/ faculties. The Medicine and Dentistry faculties have considerably bigger budgets in almost all cases than any of the other schools/faculties included in this data set. This is largely due to the high costs of teaching Medical students (BMA reports the tuition costs at £228,962 to train a medical student to become a GP., 2013). If these finances are not largely directed towards access to specialised equipment/facilities, which is rational given the high staff costs, students may give statement 18 a low score. Given the bigger budgets this will have a greater effect on the coefficient than a school/faculty with a smaller budget. The relationship of “lnfin” with the “Academic support” and “Organisation and Management”

tostaff trstaff ssto sstr aar lnstu lnfin _cons N r2 rho

(1) NSS b/se 0.074 (0.062) 0.006 (0.005) * 0.004 (0.002) 0.009 (0.011) *** -38.440 (13.482) 4.829 (3.980) * 2.052 (1.082) 5.516 (27.493) 649 0.041 0.798

The “aar” is significant at the 1% level in Figure 4. Using the same interpretation as for “aar” in the previous regressions we see a 0.01 increase in the “aar” leads to -0.384 change in the NSS rank, ceteris paribus. This result indicates that the most influential variable – granted the influence of this variable is still small – for a Russell group University looking to improve its NSS score is the number of people it accepts relative to the number of people who apply. Before running these regressions I did not expect “aar” to be the most influential variable for the NSS. If we take my suggested explanation for why “aar” was significant in figure 3 it may be the case that I underestimated the extent to which students compare the support they receive from their school or faculty to their peers. If resources were more thinly distributed as more students are accepted relative to

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the number who apply this could lower the quality of experience for each student. For example; suppose an Economics department had a limited number of one to one classes available to teach students how to use software programmes and due to a less able cohort the department had to shorten the length of these sessions to accommodate more students. Students individually may feel less supported and as such given a lower NSS score than the previous cohort even though the Economics department did

not reduce its offering overall. While “aar” was significant it was surprising none of the other independent variables were significant at a 5% or 1% level. Conclusion My empirical evidence has three main findings; firstly it seems the most important variable when focussing on increasing the institutions average score across all 22 questions is the number of students accepted relative to the number of students who applied. Secondly I find no relationship between the number of teaching

staff and the number of students in a school or faculty, which may bring into question current institutions strategies when looking to improve NSS score. Finally different NSS sections were influenced by various independent variables which could help institutions have a more focussed approach if looking to improve specific aspects of particular schools or faculties. However this does not mean that Russell group institutions should now base their strategy to improve their NSS scores solely on these three results.

The Economics of Terrorism Usman Saleem (BSc Economics, ‘14, The University of Nottingham)

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..he purpose of this study is to empirically investigate the impact of the socioeconomic and political conditions on the incidence of terrorism using a panel data approach. This research analyses two sets of regressions. One set of regression is run on an unrestricted data set of 86 countries. The same set of regression is then run on a restricted dataset of 21 Muslim countries. The results indicate that in the case of the Muslim countries both economic and political conditions matter. There exists a non-linear relationship between GDP per capita and the incidence of terrorism. The political conditions are important in both the regressions, albeit with different signs. Foreign intervention and Transition, which measure state failure, are found to be positively significant. These results highlight that the economic and political determinants of terrorism can be seen as complementary rather than conflicting. They also indicate that results may differ across regions and countries and thus a one-size policy of terrorism will not be very effective. Terrorism is defined as the utilization of intimidation and violence concentrated at a great populous with the aim to coerce the government to yield into ideologically or politically driven demands (Frey and Luechinger, 2004). Since the 9/11 attacks and the rise of Islamic fundamentalism, terrorism and its determinants have come under intense scrutiny by economists. In economics, the literature on terrorism has made note-

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worthy developments, building on significant research that was already available but gaining a newfound prominence. The purpose of this body of work has centered mainly on one question: “What breeds the incidence of terrorism?” Answering such a question is vitally important to understand which of the counterterrorism strategies are most effective. The literature has identified two core groups of determinants which can be seen as creating or fostering the incidence of terrorism in a country: (1) Socio-economic conditions as indicated by the GDP per capita, income inequality and the level of education, (2) Political conditions as measured by freedom and civil liberties and regime durability. Despite a large body of growing empirical literature, economists have not emerged on a consensus on the factors that determine terrorism; on the contrary, the results vary in sign and significance . The previous literature has mainly focused on data sets, which combine transnational terrorism and domestic terrorism (RAND Database of Worldwide Terrorism Incidents) and have limited geographical and time coverage (MIPT Terrorism Knowledge Base and TWEED). A limitation from utilizing these data sets is that the estimates from these studies cannot be transferred specifically to the case of domestic terrorism. Due to such a wide range of conclusions in the literature and an increased understanding that one policy does not fit all especially in regards to domestic terrorism, more comprehensive studies need to be undertaken.

This research provides such a comprehensive study. This study progresses on a fertile ground planted by a number of economists, which is that it aims to analyse the socioeconomic and political determinants of terrorism for the period 1972-2008 for 86 countries. However, an innovation in this research is the utilization of the Global Terrorism Data Base (GTD) and its focus on domestic terrorism. Unlike the data sets in the past, the GTD has separated the different types of terrorism and has a larger geographic (130 countries) and time (19702011) coverage. This has provided the opportunity for a comprehensive analysis of terror, since the research is not limited to only 15% of terrorist incidents, which has been the case in most of the previous research. Moreover, it enables the analysis to focus specifically on domestic terrorism. Therefore, the first question the study aims to answer is: Whether the incidence of domestic terrorism is rooted in socioeconomic conditions or political conditions? The main novelty of this research is the focus on a comparison of the determinants between an unrestricted sample of 86 countries and a smaller restricted sample of 21 Muslim majority countries. The Muslim world has faced the highest number of terrorist activities in the world after 9/11. Despite this, the determinants of terrorism in Muslim countries have not received considerable attention. As per my knowledge, there has only been one study (Tes-


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tas, 2004), which has specifically looked at Muslim countries but even that has been in regards to transnational terrorism. Muslim countries have been selected as a set of countries, with respect to the fact that domestic terrorism has been highly prevalent in these countries because of the growth of Islamic fundamentalism. Therefore, the second question this study aims to answer is that can the results and policy ramifications of the unrestricted analysis also be applied to the restricted analysis? In other words, do the results from the unrestricted analysis stand true for all countries? This can have important ramifications at the counterterrorism strategies level.

per capita is GDP divided by the midyear population and is taken from the World Bank data set. The natural logarithm of GDP controls for possible scale effects.

1 - Empirical Method and Data This research analyses two sets of regressions. One set of regression is run on an unrestricted data (UR) set of 86 countries. The same set of regression is then run on a restricted (R) dataset of 21 Muslim countries, which is a subset of the unrestricted dataset. The criteria for a country to be selected as ‘Muslim’ was to have a majority (51% or above) of the population to be classified as practicing Islam as their official religion (CIA World Factbook, 2014).

To control for the political conditions, two variables are incorporated to measure the scope of opposition to the government. The variable ‘‘FH Score’’ measures the extent of civil and political freedom within a respective country and was calculated by averaging the two indices produced by Freedom House. FH Score is measured between the range of one to seven, where one represents a “free country” with regards to civil and political liberties whilst seven indicates a country which is “not free at all”.

1.1 - Data Description Dependent Variable: Domestic Terrorism Incidents The dependent variable INCD measures the frequency of domestic terrorism incidents in a respective country in a given year. The data on this variable is derived from the Global Terrorism Database (GTD). The GTD is a novel data set as it contains more than 90,000 terrorism incidents between a large time period of 1970-2011, thus providing a greater exposure than any other accessible data source. It has been collected by the Study of Terrorism and Responses to Terrorism (START) research institute at the University of Maryland. Explanatory Variables Three socio-economic variables are included to test for the relationship between socio economics conditions and the incidence of terrorism. The first economic variable is GDP per capita. GDP is the sum of gross value added by all the resident producers in the economy plus any product taxes and minus any subsidies not included in the value for the products (World Bank, 2014). The GDP

“GINI” which is a measure of income inequality is taken from the Estimated Household Inequality Index. The Gini Index measures the statistical dispersion of the income distribution of a given country’s population. It is measured on a scale of 0 (perfect equality) to 100 (absolute inequality) (UTIP, 2014). “EDUC” measures the total enrolment in secondary education, expressed as a percentage of the population of official secondary education age (World Bank, 2014). This data was taken from the World Bank dataset.

Is the incidence of domestic terrorism is rooted in socioeconomic conditions or political conditions? The second political variable, Durability (DURAB) measures the number of years since the most recent regime change. In other words, the number of years a country has been under a specific political system (i.e democracy or authoritarianism). This data has been derived from the POLITY IV Project. This analysis also includes three dummy variables to measure state failure. This data is taken from the POLITY IV Project. TRANSITION denotes a value of 1 if a country is undergoing a major transition of political system for example transitioning from authoritarianism to democracy and a value of zero otherwise. Before a new political system is established, there exists a “transition period” during which new institutions are planned, legally constituted and put into effect (Systemic Peace, 2014). FOREIGN denotes a value of 1 if a country is under foreign intervention and a value of zero otherwise.

Foreign intervention describes periods of foreign occupation in a given country. ANARCHY is another dummy variable, which takes the value of 1 when a country is under anarchy (a period of interregnum when there is a complete collapse of the government) or zero otherwise. To control for demographic determinants, lnPOP is measure of a country’s population between the years 1972-2008. A quadratic term is incorporated into an extension of the baseline model. The quadratic term lnGDP2 is utilized to test if there exists a non-linear relationship between the incidence of terrorism and GDP per capita. Therefore, the following base-line regression model will be used in this study:

Where, t= 1,…,T is time period and i= 1,…,n is countries and is the error term 1.2 - Empirical Method The next step in the analysis is to construct the formal econometric model that will be used to estimate and understand the questions presented in this study. This dissertation investigates the effects of political and economic conditions on the number of domestic terror incidents (INCD) across the years 1972-2008 using panel data analysis. This analysis is first carried out in regards to the complete unrestricted data set of 86 countries. The same analysis is then undertaken with regards to a restricted version of the same data set, which only includes 21 Muslim countries. The difference in coefficients is then compared. Due to a presence of heteroskedasticity and serial autocorrelation, the model was estimated using the Prais-Winston regression, which utilizes panel-corrected standard errors (PCSE). 2 - Results and Discussion Section 2.1 will present and discuss the results of the unrestricted (UR) dataset whilst Section 2.2 will conduct an identical analysis for the restricted (R) dataset. Section 4.3 will compare the results of both the datasets.

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2.1 - Results and Discussion of Unrestricted Dataset INCD Â

1 Â

2 Â

1.151316  (6.562261)   0.040994   (0.1751635)   -­�1.040936   (0.7005675)   4.931221**   (1.931243)   -­�0.4832605***   (0.0415253)   36.44814  ***   (13.82793)   8.979088   (13.67204)   15.13891  **   (8.226988)   17.13637  ***   (6.66216)  

42.98416  (31.40143)   0.0316359   (0.1718854)   -­�1.041892   (0.7006963)   4.942427  **   (1.933311)   -­�0.4360495***   (0.1307798)   18.90109   (23.91717)   9.049738   (13.54678)   14.28964  *   (7.923709)   17.90355  **   (6.515957)  

đ??Ľđ??Ľđ??§đ??§đ??†đ??†đ??ƒđ??ƒđ???đ???đ?&#x;?đ?&#x;? Â

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-­�2.770363  (2.000894)  

Time  effects   Country  Fixed  Effects   Observations   Wald  chi2   Prob  >  chi2  

Yes  Yes   2942   2.89e+07   0.000  

lnGDP  EDUC   GINI   FHScore   DURAB   LnPOP   TRANSITION   FOREIGN   ANARCHY  

Yes  Yes   2942                      4.49e+07   0.000  

Table 1: Results from the UR Regression â&#x20AC;˘ *p<0.10, **p<0.05, ***p<0.01 â&#x20AC;˘ Standard Errors are mentioned in parentheses

Table 1 presents the PCSE regressions of two different specifications. Regression one which is the baseline specification yields striking results. None of the economic indicators, GDP per capita, income inequality and level of education are significant determinants of terrorist incidents. This is contrary to Gurrâ&#x20AC;&#x2122;s idea of â&#x20AC;&#x153;relative deprivationâ&#x20AC;? and of many policy makers who argue that economic development measures are related to decreased incidence of terrorism. This result is consistent with some of the existing literature (Abadie, 2006; Drakos and Gafos, 2006). However, it must be taken into consideration that the insignificance of the level of secondary school education does not refute Krueger and Maleckovaâ&#x20AC;&#x2122;s (2003) hypothesis that those who participate in terrorism have higher educations levels. This study, although while controlling for secondary level education, does not control for other higher-level education such as tertiary enrolment due to data unavailability. Therefore, whilst it can be said that secondary level education has no significant relationship with the incidence of terrorism, a relationship with tertiary level education will need to be investigated. On the other hand, the political variables are found to be significant. FHScore is significant at the 5% level and has a positive relationship with terrorism. An increase in the Freedom House score would lead to an

32

increase in the number of terrorist incidents by almost five, ceteris paribus. This result is consistent with that of Piazza (2007): countries, which are more repressive, would have higher incidences of terrorism, as it is easier for terrorist organizations to recruit members in repressed environments.

that population and regime durability cannot explain the incidence of terrorism in Muslim countries. INCD Â

3 Â

4 Â

1.618519  (6.029708)   -­â&#x20AC;?0.2813615   (0.1928215)   -­â&#x20AC;?0.5792587   (0.3710301)  

111.699***  (16.68667)   -­â&#x20AC;?0.876756   (0.2004689)   -­â&#x20AC;?0.5588844   (0.3794812)  

-­â&#x20AC;?3.823854**  (1.518696)   -­â&#x20AC;?0.1239832   (0.099953)   22.303   (15.8725)   32.33354  ***   (9.369637)   14.57342  **   (8.226988)   -­â&#x20AC;?12.15602   (9.179837)  

-­â&#x20AC;?3.539961**  (1.548738)   -­â&#x20AC;?0.0828201   (0.0997542)   56.26044  ***   (20.39919)   32.76339  ***   (9.421992)   12.56941    *   (7.164179)   -­â&#x20AC;?11.63831   (8.849462)  

đ??Ľđ??Ľđ??§đ??§đ??&#x2020;đ??&#x2020;đ??&#x192;đ??&#x192;đ???đ???đ?&#x;?đ?&#x;? Â

Â

-­â&#x20AC;?7.389328  ***   (1.207929)  

Time  effects   Country  Fixed  Effects   Observations   R-­â&#x20AC;?  Squared   Wald  chi2   Prob  >  chi2  

Yes  Yes   710   0.1289   16884.67   0.000  

Yes  Yes   710   0.1352   17662.95   0.000  

lnGDP  EDUC   GINI  

Durability is significant at the 1 % level and is found to have a negative relationship with the incidence of terrorism. This result could be explained by the fact that longer regimes have a stronger control and are better â&#x20AC;&#x2DC;trainedâ&#x20AC;&#x2122; to repress the dissenting terrorists. However, this result must be taken with caution, as the effect is only marginal (-0.43). Consistent with the empirical literature, population is positively related to the incidence of terrorism. However, the result is only marginally significant, as an increase in the population by 1% would lead to an increase of terrorism incidents by 0.36 so this estimate can effectively be ignored. The dummy variable foreign and anarchy are highly significant with large positive coefficients of 15 and 17 respectively. Transition on the other hand is found to be insignificant. These results provide support to the empirical results of Basuchoudhry and Shughart (2010) who find that state failure is conducive to terrorism. Both foreign interruption and anarchy (periods of interregnum) leave behind a vacuum of power in which the terrorist organizations face no opposition to their activities thus resulting in a higher incidence of terrorism. Regression two shows the result from the extended version of the baseline model, which included the squared term of GDP per capita. The results are the same as of Regression 1 except that population is now found to be insignificant. 2.2 Results and Discussion of Restricted Dataset Table 2 presents the results from the restricted data set regression. Regressions three and four correspond to that of the regressions of the unrestricted data, however these are run only on 21 Muslim Countries. Regression three indicates that the economic variables of GDP per capita, inequality and education are insignificant in the case of Muslim countries. The variables of population and regime durability are also insignificant, indicating

FHScore  DURAB   lnPOP   TRANSITION   FOREIGN   ANARCHY  

FHScore is statistically significant as before, albeit with a different sign highlighting it to be a negative predictor of terrorism. The coefficient of FH Score clearly highlights that an increase in the FH Score by one unit (the country values civil and political rights much less), decreases terrorism by almost 4 attacks, ceteris paribus. This result can be explained by the idea, that there is a stronger grip on the population by the government when the civil rights and political rights are constrained thus making it more difficult for terrorists to operate. Moreover, authoritarian systems have coercive paramilitary organizations that limit terror operations. This finding could also highlight that democracies may face more terrorism due to their protection of civil and political rights, which results in their increased vulnerability. This result is in line with the estimate found by Lai (2007). Transition, which is a dummy variable, is highly significant and has a positive relationship with the incidence of terrorism. An extra year of transition in a country that is undergoing a change in political system would lead to 32 terrorist incidents, ceteris paribus. It is a result unique to Muslim countries and can be explained by the fact that many of these countries are undergoing or have undergone transitions from democratic to autocratic or vice versa many times in their history, thus making the situation much more volatile and conducive to terrorism. Foreign intervention is significant and has the same interpretation


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as in the unrestricted regression whilst anarchy is found to be insignificant.

Research

2.3 - A comparison of the unrestricted and restricted results INCD Â

In Regression four, the estimates are similar to that of regression three except with one novel change. This model, which utilizes the squared term of GDP per capita indicates that the economic predictor of GDP is statistically significant at the 1% level and has a positive coefficient. The negative coefficient of the squared term states that there is a turning point after which an increase in GDP per capita will lead a decrease in incidences of terrorism and thus there exists a nonlinear relationship. Precisely, a 1% increase in GDP per capita would lead to an increase in the number of terrorist attacks by one ceteris paribus. However, after the country passes a threshold of a GDP per capita of $1750, there is a turning point where the increase will lead to a decrease in incidence of terrorism. This threshold is not large by the world standards, but is a large threshold for some Muslim countries (nine out of the 21 countries in our data set have a GDP per capita of less than $1750 in 2008) Although very different to the relative deprivation hypothesis, this result can be explained by understanding the context of the Muslim countries. Many of these countries are either new or weak democracies or single party, military states. Therefore, when an increase in GDP does occur, due to the corrupt nature of the governments, the benefits of the increase are not accrued by the middle classes but rather by the ruling elite. However, as the turning point states, that at point when the country is relatively economically successful, the opposite will happen. This idea can be explained by the fact that sufficiently advanced economies are stronger democracies and therefore less corrupt. The payoffs from this rise in GDP are then shared by the majority of the population rather than just by the ruling elite. This explanation fits with the argument of â&#x20AC;&#x2DC;immiserizing modernizationâ&#x20AC;&#x2122; suggested by Olson (1963) who argued that economic growth could exacerbate political violence. Olson stated that rapid economic growth could lead to several economic imbalances, which would result in a high level of unevenness. He further added, that it is this high level of unevenness, which could lead to large degree of political violence.

lnGDP  EDUC   GINI   FHScore   DURAB   LnPOP   TRANSITION   FOREIGN   ANARCHY   đ??Ľđ??Ľđ??§đ??§đ??&#x2020;đ??&#x2020;đ??&#x192;đ??&#x192;đ???đ???đ?&#x;?đ?&#x;?  

2 Â

4 Â

42.98416  (31.40143)   0.0316359   (0.1718854)   -­â&#x20AC;?1.041892   (0.7006963)   4.942427  **   (1.933311)   -­â&#x20AC;?0.4360495***   (0.1307798)   18.90109   (23.91717)   9.049738   (13.54678)   14.28964  *   (7.923709)   17.90355  **   (6.515957)  

111.699***  (16.68667)   -­â&#x20AC;?0.876756   (0.2004689)   -­â&#x20AC;?0.5588844   (0.3794812)   -­â&#x20AC;?3.539961**   (1.548738)   -­â&#x20AC;?0.0828201   (0.0997542)   56.26044  ***   (20.39919)   32.76339  ***   (9.421992)   12.56941    *   (7.164179)   -­â&#x20AC;?11.63831   (8.849462)  

-­â&#x20AC;?2.770363  (2.000894)  

-­â&#x20AC;?7.389328  ***   (1.207929)  

Table 3 â&#x20AC;&#x201C; A comparison of the unrestricted and restricted â&#x20AC;˘ *p<0.10, **p<0.05, ***p<0.01 â&#x20AC;˘ Standard Errors are mentioned in parentheses

Table 3 compares the results of regression two of the unrestricted data set with regression four of the restricted dataset. It highlights a stark contrast of the estimates indicating that the results of the unrestricted dataset do not transfer to the specific case of Muslim countries.

Muslim countries need to have repressed civil and political freedom in order to reduce the incidence of terrorism. GDP per capita for example is significant in the case of Muslim countries only when the squared term of GDP is added to the regression but it is not significant in the unrestricted case at all. As mentioned before, the squared term is a better representation of the creation of terrorism in intermediate developing countries. Many Muslim countries are in such a position, therefore applying specifically to the restricted regressions. In the case of Muslim countries, it can be said that economic conditions do matter to the incidence of terrorism. Although, the effect of GDP is marginal (one terrorist incident), it does highlight that policymakers need to understand that a one-size policy will not be effective in every region. In fact, to counter terrorism in different regions, it is important to understand the specific determinants in those set of countries.

The political variable FHScore is significant in both the regressions highlighting that political conditions are also important. In comparison, to the unrestricted regression, the sign of the variable changes from positive to negative in the restricted regression. Therefore, highlighting that the results from the unrestricted data set cannot be passed over to the case of Muslim countries. Although if taken prima facie, the estimate of FHScore would indicate that governments in Muslim countries need to have repressed civil and political freedom in order to reduce the incidence of terrorism. However, Muslim countries can learn from developed countries like the United States of America and United Kingdom who have worked around their high liberties to introduce legislation, which are controversial (Patriot Act) but have been instrumental in helping the state countering terrorism. The problem however is that Muslim countries do not have sufficiently advanced political institutions that can endorse such legislations. Ultimately, economic progress in these countries will lead to advanced political institutions, which can counter terror more effectively. The dummy variables also yield arresting results. The dummy of foreign intervention was positively significant in both regressions highlighting that in the general case as well for Muslim countries, foreign intervention is an important determinant of terrorism. This has a very important policy implication for governments who undertake foreign intervention. These governments must ensure that the countries, which they occupy are rebuilt and a central authority is established before they exit those countries. Charlie Wilson, the senator who lobbied for aid to Afghanistan after the Soviet occupation argued that the power vacuum and underdevelopment in Afghanistan laid the foundation for the rise of Taliban in Afghanistan (Crille, 2003). The dummy variable of transition is a significant predictor of terrorism in Muslim countries. This result does not stand true for the unrestricted dataset. An implication of this estimate for Muslim countries is that neighbours in the region must ensure that transitions happen smoothly by providing support. If the government that takes power is weak it could have detrimental effects not only for the origin country but also for other countries in the region due to the global nature of terrorism.

33


The Nottingham Economic Review

Research

3. Conclusion In this research, I have analysed the determinants in a panel approach over the years 1972-2008. Due to the GTD, this paper was able to specifically focus on domestic terrorism and Muslim countries. I first conduct an analysis on the unrestricted data set of 86 countries followed by an identical analysis of 21 Muslim countries, which were a subset of the unrestricted dataset. The aim of this study was twofold: first, to empirically investigate the relationship between the incidence of terrorism and the political and economic conditions in a country. Secondly, to identify whether the results from the general dataset of 86 countries cross over to the restricted dataset of Muslim countries. I find that both economic conditions and political determinants matter to Muslim countries, but this does not apply to the general unrestricted dataset; herein lies my main contribution to the literature. I find that the economic determinant of GDP per capita is significant only in the case of Muslim countries. A 1% increase in the GDP per capita would lead to an increase of one incident of domestic terrorism. Although marginally significant, I find that there exists a turning point (at the threshold of $1750 GDP per capita, where a 1% increase would lead to a decrease in the incidence of domestic terrorism. This result does not hold for the unrestricted data set. The other socio-economic variables (income inequality and education) are insignificant in all the regressions. The political variables are significant in both the datasets albeit with different signs. FHScore is positively related to the incidence of terrorism in the unrestricted data set whilst it is negative related to the incidence of terrorism in Muslim countries. Regime durability is only significant in the unrestricted data set. Of particular importance are the variables that measure state failure. Foreign is significant in both the data sets, highlighting that countries that have undergone foreign occupation are more conducive to terrorism. Furthermore, transition is only significant in the restricted analysis lending support that Muslim countries, which experience state failure, are likely to face higher incidences of domestic terrorism. Therefore, the political conditions matter in both the general case of 86 countries and the subset of Muslim countries. The economic conditions are

34

important only in the case of Muslim countries and thus suggest that rather than being seen as opposing answers to the same question, they should be seen as complementary. The above results indicate, that a one-size counter terrorism policy may not fit in every case. The determinants may differ across various regions, and therefore policymakers must take every region and country as an isolated case when deciding on any strategy. 3.1 Policy Implications The analysis suggests that a counter-terrorism strategy for Muslim countries must be multi faceted. Firstly, governments should ensure that the economic gains of GDP growth be shared with those marginalized in the population. Policies, which promote economic participation and growth, can yield a benefit in terms of a reduction in terrorism. These policies may also have a knock-on effect on improving the institutional quality of the political institution’s, which can provide a medium for those repressed to voice their opinions. Furthermore, countries should ensure that their counter terrorism policies have embedded in them procedures that aim at stabilizing regime. Governments in transition should receive support from the neighbouring countries and a focus must be on creating simultaneously a democratic and resilient regime. More generally, the redevelopment of countries that have faced foreign occupation is imperative, as these countries can be a breeding ground of terrorism. 3.2 Future Research Future research should focus on variables, that this study could not consider such as the impact of tertiary enrolment, ethnic and racial fractionalization and minority and regional economic disparity. For a comprehensive analysis, there should a focus on the causal linkages between the determinants and incidence of terrorism. Of particular importance, should be the focus on understanding the determinants of terrorism across different regions and countries. Researchers can also analyse how the determinants of terrorism have changed over time. In reference to Muslim countries, researchers can vary the level of the Muslim population in a country, to view whether this has an effect. All of these aspects are important in finding the panacea to terrorism. References

Abadie, A. (2004). Poverty, political freedom, and the roots of terrorism

CIA World Factbook, (2014). The World Factbook. [online] Available at: https://www.cia.gov/library/publications/the-world-factbook/ [Accessed 12 Apr. 2014]. Crile, G. (2003). Charlie Wilson’s war. 1st ed. New York: Grove Press. Drakos, K. and Gofas, A. (2006). In search of the average transnational terrorist attack venue. Defence and Peace Economics, 17(02), pp.73--93. Frey, B. and Luechinger, S. (2003). How to fight terrorism: alternatives to deterrence. Defence and Peace Economics, 14(4), pp.237--249. Frey, B. and Luechinger, S. (2004). Decentralization as a Disincentive for Terror. European Journal of Political Economy, 20(2), pp.509--515. Gries, T., Krieger, T. and Meierrieks, D. (2011). Causal linkages between domestic terrorism and economic growth. Defence and Peace Economics, 22(5), pp.493-508. GTD Codebook, (2014). National Consortium for the Study of Terrorism and Responses to Terrorism. [online] Available at: http://www.start.umd.edu/gtd [Accessed 12 May. 2014]. Gurr, T. (1970). Why men rebel. 1st ed. Princeton, N.J.: Published for the Center of International Studies, Princeton University [by] Princeton University Press. Krueger, A. and Maleckova, J. (2002). Education, poverty, political violence and terrorism. 1st ed. Cambridge, MA.: National Bureau of Economic Research. Lai, B. (2007). “Draining the Swamp”: An Empirical Examination of the Production of International Terrorism 1968-1998. Conflict Management and Peace Science, 24(4), pp.297-310. Olson, M. (1963). Rapid growth as a destabilizing force. The Journal of Economic History, 23(04), pp.529--552. Piazza, J. (2006). Rooted in Poverty?: Terrorism, Poor Economic Development, and Social Cleavages 1.Terrorism and Political Violence, 18(1), pp.159--177. Piazza, J. (2007). Draining the Swamp: Democracy Promotion, State Failure, and Terrorism in 19 Middle Eastern Countries”. Studies in Conflict & Terrorism, 30(6), pp.521-239. Rapoport, D. (2004). “Modern Terror: The Four Waves.”. In: A. Cornin and J. Ludes, ed., Attacking Terrorism: Elements of a Grand Strategy, 1st ed. Washington: Georgetown University Press, pp.46-73. Systemic Peace, (2014). Polity IV Project: Country Reports 2010. [online] Available at: http://www.systemicpeace.org/polity/polity4.htm [Accessed 11 Mar. 2014].


The Nottingham Economic Review

Interviews

A Conversation with Evan Davis British economist, journalist & presenter for the BBC

Interviewed by James Longman & Antonina Hassouni (BSc Economics, ‘15 & ‘14 The University of Nottingham)

E

van Davis is a presenter of the BBC Radio 4 Today programme, a role he took up in April 2008. He is also well-known as the presenter of the BBC2 business reality show, Dragons Den and a weekly business discussion programme, The Bottom Line. For the six and a half years prior to working on the Today programme he was the Economics Editor of the BBC, the most senior economics reporter in the corporation. He was promoted to that role after working as an economics correspondent for the BBC and as economics editor of the Newsnight programme on BBC2 in the 1990s. He has written numerous papers, articles and newspaper and magazine columns as well as the book, Public Spending, (published by Penguin in 1998). He is also a co-author of the Penguin Dictionary of Economics and the New Penguin Dictionary of Business. In 2013, Evan has won numerous awards. He was the Political Studies Association broadcaster of the Year; he won a bronze Sony award as Speech Broadcaster of the Year and the Made in Britain programme won the Harold Wincott Foundation Business Television Programme of the Year award. We were watching your documentary, mind the gap, where you discussed how separate London is from the UK, particularly with reference to house prices. We have seen a 10% rise in house prices outside of London, whereas the figure is 20% in London. How do you think this can be explained? The Institute for Fiscal Studies published a figure that 15% of stamp duty was coming from Kensington, Chelsea and Westminster alone - pretty astonishing really! Let’s work out what is going on with the housing market in London and the rest of the country. There

is an underlying force, which is what the program was trying to explore, that there is an unstable model of people wanting to be where everyone else is. I have sometimes likened it to nightclubs: if everyone wants to be at the nightclub where everyone else is, if that’s all that matters, then you get this instability where one nightclub is very full and you have to queue and the rest are all empty. That is just a feature of the world: if people want

crowds, then you are going to have crowded and empty nightclubs. I think that one thing that is going on in the housing market is that for the last 20 years that people have been wanting to relocate where everyone else is has if anything got stronger rather than weaker, and it is London where people have wanted to come. There is no doubt that people have moved to London, the population has grown much faster than other large cities in the UK and the population going has pushed up the house prices because housing has not kept pace. That is one really important and interesting fact about housing. This is a very important contradiction to classical economic theory, because you might expect the market to clear i.e people to move out of the city. The international banks could have decided to put their offices in Sunderland rather than Canary Warf, but what we found is that because everyone else is in Canary Warf,

that is the prime location for new entrants. Another interesting question to ask is why this has become so much more important despite being in an era where technology should substitute for co-position. We were told that the internet would mean we would be able to Skype each other, when actually instead of wanting to Skype each other we want to be next door to each other. That’s the first big point. The second big thing that foreigners want to invest in the UK, with its’ stable economy, English language, temperate climate zone and respect of property rights. These investors know only 2 things: London and real estate. So if you are a well to do Indian family with £500k to invest somewhere - boom, it ends up being a flat in London as opposed to a house in Sunderland or a shop in Nottingham. This has further pushed up the price of property. Interestingly most of that property is rented out, so that doesn’t mean the stock of housing is reduced, but it leads to this wedge between the purchase price and the rental price. Renting now looks relatively attractive compared to buying. So that’s the second thing that’s special about London. The third major cause is what is going on in the property market in general, and I cite 2 causes. Firstly yields have gone down on everything. When yields go down, prices go up whether that’s bonds, shares or property. Property tends to move a little slower than everything else however the low yields on everything else are finding their way to the property market as people realise that they can’t get a decent pension or annuity and therefore the best thing for me to do is buy a flat and rent it out. The yield I am getting on a property is much better than on other things. Baring in mind that there tends to be an overshoot in financial markets, such that if prices are going up and yields are going

31 35


Interviews

down you will see an overshoot which may well be occurring in the moment. The last factor is demographics nationally. With the population growing nationally, the supply of property just cannot keep up. What kind of property do people want? The big growth in population is amongst the elderly, who are actually big consumers of property as they generally stay in the family home well into their retirement. People live much longer too. So is it a demand side issue then? If you have high demand the you must be able to meet that demand if you don’t want people living with their parents until they are in their late 20s which is what many are doing. Whether it is demand or supply, it is a simultaneous equation. So in solving the issue, should we be looking more at demand side or supply side policies? Assuming the latter, do you think the help to buy scheme will have a contradictory effect? Instinctively it probably has. The only thing that I would say about it is that if it induces extra supply then it might have a good effect. I am not an expert on this but some property developers have said that it is inducing them to build more homes. However this is mostly down to help to buy 1, which focussed on new builds. Do you think there is a bubble in London and if that were to burst then what do you think the effect would be on the rest of the UK? There are 6 estate agents within 100 meters of where we are sitting and 2 of them have opened in the last six months. This estate agent bubble does worry me and it seems inconceivable that a city can function with purchase prices that are 15 times annual earnings, it doesn’t seem sustainable. What would happen if this bubble comes down? I do hope it does so that people could afford to buy a place rather than just rent. I still hope for a house price crash because I want to upgrade from a one bed flat to a house with a garden. The key question is what would happen to the London economy. It would mean a significant downturn because as I walk around in London, a lot of the activity seems to be related to housing and construction. Do I think it would lead to a post Lehamn Brothers situation? Probably not.

36

The Nottingham Economic Review

How do you think the rest of the country would be affected? Well there are quite a few high valuations in the country, however they are more dispersed. I think in general a decrease in house prices would be for the benefit of the population. I should note that, in typical economist fashion, every prediction I have made on the property bubble has been pretty bad! We are given the illusion that the UK economy is doing quite well and has one of the highest growths in developed countries however there is quite clearly an output gap. What are your thoughts? I rarely use the term output gap, and I’m not convinced on its suitability of being used to frame the debate around the growth of our economy. It does have some use in generating observations about the economy, however I have started to grow a bit perplexed about its suitability. Economists tend to look at the output gap as the difference between an extrapolated graph and an actual growth rate – how much slack you have in your business or labour market.I’ll give an example of how it is becoming increasingly unhelpful. In Spain, at the peak of the boom, 20% of the economy was in construction, with most of it being residential. The crash comes and no one can get finance to build houses which in turn people have no need for. Now let us assume that employment falls by 20%. Using conventional measures we would say that now we have a 20% output gap, which is true, as you could get those people back to work if you could finance the construction of those houses. However it will take a while for new business to fill the gap that you have, as it takes a while for businesses to find new things to do before they can employ people. Therefore I’m not sure how useful it is to use that output gap. In a similar situation, our economy has relied too much on domestic consumption which was viable when borrowing was relatively easy, however our figure for output before the financial crisis is not relevant: it was not sustainable. It was not useful capacity because it is capacity that needs to be redeployed. The more useful concept is to rebalance our economy toward more viable businesses. The real debate is how to turn domestic businesses into exporters. We haven’t actually addressed the issues of what to do with supply, which in turn has caused people to think about what economic dial to turn to get rid of the gap instead of thinking of how grow the economy in the long run. The austerity debate is over;

we have growth and a recovery however we haven’t managed to make the economy more flexible. Do you think that technology firms are overvalued from the outset if their advertising, especially on mobile platforms, is unsustainable, especially considering that advertising is a key source of revenue for this firms? Lets consider why they might be overvalued. Why would there be a systematic overvaluation of these things? We know that bubbles occur. The dot com bubble in the late 90s - the prices came down 90% or so. This time, it doesn’t feel like a bubble, they look rather overvalued but I don’t know why they would be. I think you are on an interesting point about revenue streams. It is often the case that firms try to cause big impact and work out revenue streams later, especially in the technology field. Can it be that this isn’t monetisable? Big impact surely means you can monetise, but how do you do it? The classic example is Facebook, which is a highly monetisable model however is at the same time sensitive advertising: too much and people will stop using it, causing a collapse in the user base. Just Eat is big, but it is valued at billions, do you think that is entirely rational? The market sometimes forgets that an app may have a life of 2 years before the next one comes along. A particular company, King, was crazily overvalued. This particular mistake is extrapolating one success and expecting future success. With reference to Just Eat I don’t think I understand entirely, especially considering it is essentially a directory, and is not bringing anything revolutionary to the market. What I will say is we keep saying that this time is different. I did for example make an investment in 1999 in Google, which turned out rather well. Looking at the crash as a whole, especially the material waste of physical capital, I don’t think it was so bad. Bubbles create a redistribution of money. As a result I’ve grown to respect non-economists more than I used to, and at the same time disrespect the finance people much more as it’s plain to me that they don’t know what they are doing.


Interviews

The Nottingham Economic Review

A Conversation with Tim Harford British economist and journalist

Interviewd by James Longman (BSc Economics, ‘15, The University of Nottingham)

T

..im Harford is a senior columnist for the Financial Times. His long-running column, “The Undercover Economist”, reveals the economic ideas behind everyday experiences, while he also writes op-eds, interviews and long feature articles for the FT. Tim’s first book, “The Undercover Economist” has sold one million copies worldwide in almost 30 languages. He is also the author of “The Logic of Life“, “Dear Undercover Economist“, “Adapt” and most recently “The Undercover Economist Strikes Back“. He is an evangelist for the power of economics, wisely used, and has spoken at TED, PopTech and Sydney Opera House.

Tim won the Bastiat Prize for economic journalism in 2006 and was runner up in 2010. Tim was named one of the UK’s top 20 tweeters by The Independent. Tim has appeared on the Colbert Report, Newsnight, Marketplace, Planet Money, PM, Today, The One Show and many other popular radio and TV programs. His writing has been published by the leading magazines and newspapers on both sides of the Atlantic, including Esquire, Forbes, Wired, New York Magazine, the Guardian, the Sunday Times, the Washington Post and the New York Times. What is your writing process? It is different every time. Adapt took about 3 years of thinking, adjusting, interviews and reading. The Undercover Economist Strikes Back was written quite quickly and that is really to do with knowing what the book is trying to do. The The Undercover Economist Strikes Back is about macroeconomics, and we know what the issues are, which just left the writing style. After the first 2 chapters or so, it became apparent that dialogue was best. There are 2 things about macro: 1. It is quite abstract 2. It is contested - there is nothing in macroeconomics that people aren’t willing to argue about where as microeconomics is

less debated. How do you reflect that contested nature? How do you reflect that as a writer you have reservations about what you are saying? The answer is that as a writer using dialogue you can make it clear that you don’t buy that or you don’t believe it. It wasn’t something I had deduced from first principles however as mentioned it became clear that it was a suitable option.

Recently we saw a minimum wage increase what is your take on this and do you think the minimum wage is enough? I think if we are relying on legislation to prop wages you then we have a problem. I am a supporter, though was sceptical at first, and whilst we are all aware of the theoretical issues e.g putting the minimum wage too high and causing unemployment; there is a trade off. You might increase the bargaining power of lower paid employers at the expense of employment. Fundamentally the problem is that there are a lot of people not being paid very well - there is a limit to how much legalisation can help that. We need to address the productivity of the workers and that is a very large topic to do with education, regulation, infrastructure, industrial strategy and all sorts of things. The minimum wage is only going to get you so far, it’s only marginal.

Do you think that employers feel that by paying the minimum wage they are doing the necessary? What about the affect on employment conditions? Tax credits? Tax credits are an attempt to give a more flexible support for low paid workers. What we are saying is we are blaming employers for employing people on low wages. There is an alternative: we don’t employ them at all! I’m not employing someone below minimum wage, does that give me the moral highground? My understanding is that the bureaucracy of the tax credit system undermines the economic value for which it was implemented. It is really down to the administrative capacity of HMRC and the department for work and pensions. Are there any other policies that you think could be implemented? One of the things I would like to see, which is a statistical point, is what is the overlap with household in the bottom 20% of the income distribution and households earning the minimum wage. You might think that they are the same but that’s not always the case. Clearly there are households where people are not working you do not help those people by increasing the minimum wage or with tax credits. Either you help them get into work or reduce their benefit payments. Similarly there are households where people are earning the minimum wage however the household is doing fine - they are young people living with their parents, couples where one is working the minimum wage and the other is earning a lot more. Increasing the minimum wage may not be targeting poverty then. I don’t raise that to muddy the water: it’s very easy for us to jump to conclusions about who we are helping ‘s not that simple. Another example is how Oxfam have recently been creating a lot of noise about wealth inequality based in data which includes debt. It’s not clear what

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is going on there. When you graduate from university you will probably have negative wealth however I have confidence that this won’t be a problem for you. There are people out there who have positive wealth who are functioning a lot worse than a university student like yourself. Oxfam also came up with this statement about the richest 86 people in the world having more money than the poorest 3.5 billion people in the world. Wasn’t that on the most recent episode of “More or Less” on Radio 4? Indeed it was however I think that there is more to be said on the subject. The issue of negative wealth is that my 2 year old son has more wealth than any of the poorest 1.5b people in the world because he has not debts. Moreover he has more money than all of them put together. On aggregate they have negative wealth so any non-negative position will leave you better off than all of them out together. Have we learnt something there about the distribution of wealth in the world? Not really - we have just learnt that some people have debts. So what? This doesn’t minimise the problem by creating statistical noise. There is no single answer as to how we should measure it however as an example the IFS measure consumption in the UK rather than income and the reason is that there are people (students an example) who are temporarily employed and have low income however their consumption is quite high. They are confident that they will have a bright future meaning they are happy to smooth their consumption. What you find is the people with the lowest 10% of income are not that poor - it’s a temporary thing. However those with the lowest consumption are those with the problem. There is no right or wring way of doing it though - learn the result from different measures. I saw you tweeted during The Budget that Labours figures were out of date. What do you suggest that the next parliament does to address this cost of living crisis? Do you mean in terms of economic policy or politicians using dodgy numbers? The latter isn’t new! The budget isn’t always easy to differentiate between politics and economics. Strictly speaking economics - what policies should we be considering?

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The Nottingham Economic Review

It’s a tremendously difficult one. If you had asked me 3-4 years ago I would have had an answer for you: we need a Keynesian stimulus. We are past that now though - the economy is through the recession and now we have just got to consider the long term structural issues which is much harder. I think the chancellor was right that the employment situation is quite good which is amazing considering the downturn. However there is a mirror image of that. If the economy is doing badly and there are lots of jobs then the workers must be very unproductive. We still don’t know why that is - that remains a puzzle. That’s the thing that we have got to try and figure out. The answers to it? Looking at the top 3, I would say unplug the planning system - that is a way to reduce a major cost whilst simultaneously creating medium skilled jobs for people who are not going to be computer programmers.

“If the economy is doing badly and there are lots of jobs then the workers must be very unproductive.” 2: Looking at improved transport and infrastructure - I don’t think HS2 is the answer however more rail capacity in particular and better links to the north of England with more capacity in the south of England. 3: I would be looking at a lot of small measures all added up to try and improve the education system. One thing that is very positive about what the government has been doing is running lots of randomised trials to figure out what the impact has been of various measures. They can sound like small things themselves however on aggregate they can make a big difference. We have not seen much on infrastructure from this government. We have seen some liberalisation of planning but we need more. The randomised trails in education as mentioned is a tremendously positive thing. Planning featured in our previous issue - a large increase in demand for housing, in part due to The Help to Buy scheme. People trying to buy houses are facing ever increasing prices. How should we tackle this issue? I’m not entirely sure. The announcement of the garden city in Kent was not a surprise. It’s been

in discussion for the past 20 odd years. The idea that 15,000 houses constitutes a city is extraordinary. I live in Oxford, not a big place, leaving this new city about 1/10 of the size. It’s going to be a large village at best. One of the interesting amendments was the introduction of the merged ISA allowance. Is this the right policy given the current situation? Economically it’s a good idea however it won’t cost much for Osbourne because none of these things are paying much interest anyway. A tax break on no interest isn’t really a tax break at all. There will come a time when interest rates rise again at which point it will be significant. Since the ISA allowance will stay this size until further policy amendments if you max out your contributions, £x a year for the next 3 years you’ll have about £40,000 in an ISA which might by then be earning a healthy amount of tax free interest. That’s a problem for another chancellor though. It is a good idea though because I don’t think that savings should be taxed in general. It’s not clear to me why we don’t have an even higher limit. We might see a situation where people would end up living off savings without paying any taxes but back to the policy it’s a good idea in general. The white rabbit of the budget was pension reform. Is this more significant? Indeed it is. With annuities reform it’s absolutely clear that the pensions system in this country is in serious trouble. Annuities have been a part of that - not being good value and hard to understand. I’m not sure that totally scrapping the annuities system is the right way forward. I have 2 concerns. The smaller concern is that people might blow the cash or be scammed. Without wanting to patronise older people it is the case that some are slowing down, some suffer from dementia, they need to be protected from the outright fraudsters but also the financial services industry taking slices from peoples cash. That is a concern. It’s probably manageable though as the annuities system was already doing a very good job of taking large slices of people’s cash. The second issue is that an annuity is fundamentally a very useful product - that’s what you want when you retire. It gives you an inflation proof income stream for you and your spouse and insurance against your life being long or short. The trouble is that they have been perceived


The Nottingham Economic Review

Interviews

as being poor value which I agree with. Is the situation going to be improved by making them optional? That’s not clear as then you have a selection problem. If you have reason to believe that you aren’t going to live for a long time then you won’t buy an annuity. Therefore those buying them will be pooled into those who are optimistic about how long they are going to live based on their own knowledge. The likely result will be the cost of providing these annuities is going to increase. The option will be to take out something like a pensioners bond that pays a modest amount of interest, the result of which is that if they can keep their outgoings low will be that they will leave more money to their children, a portion of which will be taxed however. A worrying aspect of the budget was the though growth has been good, the outlook longer term is quite flat, suggesting a large output gap. What can be done to address this? No matter how smart you are, you are never going to get all these forecasts right. I find it quite surreal that all these figures are being thrown around about what growth will be in 2016 and the affect it will have in taxation and the budget deficit. The fact of the matter is we don’t know! We have to make the forecasts so we have a baseline to judge things and we make our best guess. The way the chancellor address the issue was strange: growth has been revised up next year. Whilst optimistic this isn’t of much practical use - it’s still a

guess. An educated one, but still a guess. What we hope is that the output gap is large such that there is the prospect for more rapid growth. One thing we do know is that financial crises do very serious damage, especially to the British economy which is very dependent on finance over and above our means. Some of the growth will be slowed due to increased regulation, however I think there is more to come before we revert to the trend rate.

“there is a tremendous amount to be learnt by studying real world cases” Given that there probably is an output gap, and that we are close to the zero lower bound, should we seek to close it via the aid of the existing monetary policy or fiscal policy? The zero lower bound suggests the answer is fiscal policy however at this point the economy has had a lot of time to adjust. A lot of the stickiness that the Keynesian models would predict is surely over by now. Looking back on it the fiscal stimuli in 2009 were probably the right thing to do but we’re 5 years on now! Wage and price stickiness cannot be the problem. At that point you might suggest that fiscal policy is not going to be useful and start looking at structural issues.

One last question before we bring this to a close: do you think that the traditional economics syllabus is best suited to tackling the issues that we face today? It’s a tricky one. I’m aware that there are always opportunity costs. I think there is a strong case to be made for more economic history and behavioural economics. That’s all good stuff but what are you going to lose? What drops off the syllabus? It’s not clear looking at the syllabus what you can say you don’t need anymore. There is a trade off between the mathematical training needed to be an economist vs the more discursive non-mathematical course allowing you to get to the more exciting stuff quicker. That’s something The Undercover Economist does - how much you can get in without having to solve equations. However in reality real economics do have to solve them. I’m sort of sitting on the fence - I think that there is a strong case for more pluralism in general but I wouldn’t want to be the one who says it and therefore we should cut x,y and z from the syllabus. One thing I do feel strongly about which I think is embodied in my books is that there is a tremendous amount to be learnt by studying real world cases. That benefit is 2 fold: 1 it’s more interesting and memorable and 2 it makes you a better economist, allowing you to confront the messy details especially via comparing the theory to who the policy actually ends up affecting.

The NER would like to thank Evan Davis & Tim Harford for their time and contribution Images used:

p1 http://upload.wikimedia.org/wikipedia/commons/c/c7/Tim_Harford_in_2012.jpg & http://www.independent.co.uk/incoming/article8550298.ece/alternates/w620/v2-Evan-Davis.jpg p2 http://www.nottingham.ac.uk/CIEL/Images-Multimedia/wyn-morgan.jpg p6 http://img2.themebin.com/hd-wallpapers/1920x1200/wall_street_1920.jpg p7 http://api.ning.com/files/Yyu8CvgEEnwz1TlzQC8-yqAJWh1kbxyWFZ1nBn7iBMDotBjoJ0BaziIv-Xmlgdq14d3ZHM65G-iARCQ7DajCMMAePSOn1eSN/biodive2.jpg p8 http://i.huffpost.com/gen/1753765/thumbs/o-MICHIGAN-AFFIRMATIVE-ACTION-facebook.jpg p9 http://media.washtimes.com/media/image/2012/04/02/michigan-affirmative-_live.jpg p10 http://www.avanceon.com/images/c--users-sschlegel-pictures-dangerous_drugs.jpg p11 https://davidpball.files.wordpress.com/2012/03/drugs.jpg p13 http://upload.wikimedia.org/wikipedia/commons/8/89/Pure-mathematics-formul%C3%A6-blackboard.jpg p14 http://www.hmiaward.com/Portals/92803/images/World%20Connection.jpg p16 http://www.lib.utexas.edu/maps/historical/africa_1829.jpg p18 http://euobserver.com/media/src/afc8fdfbb6c3998d550c009b348107a5.jpg p19 http://blogs.ft.com/the-world/files/2011/09/gettygreece.jpg p20 http://s3.amazonaws.com/corpwatch.org/img/original/eurozone12%20Amigos.jpg p21 http://eso-cdn.company.bmj.com/sites/group/files/BMJ-exercise.jpg p22 http://karmajello.com/postcont/2014/02/you-need-to-exercise.jpg p26 http://cdn.sheknows.com/articles/2014/05/graduation-caps-in-air.jpg p30 http://static3.businessinsider.com/image/4e138638cadcbbd857090000/somali-terrorist-group-gets-its-twitter-privileges-back.jpg p35 http://upload.wikimedia.org/wikipedia/commons/9/92/Evan_Davis_(journalist),_2007.jpg p37 http://upload.wikimedia.org/wikipedia/commons/c/c7/Tim_Harford_in_2012.jpg

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Issue 14